This Bloomberg special report may have slipped by unnoticed last week during all of the market mayhem. Its worth reviewing, as it places blame not only at the feet of Alan Greenspan, but Arthur Levitt and Robert Rubin as well.

Excerpt:

Ten years ago, Wall Street was enjoying a bull market fed by a booming dot-com industry, a Fed chairman, Alan Greenspan, who trusted the market to correct its own ills, and a Congress amenable to lightening the touch of regulators.

In 1998, the imminent collapse of hedge fund Long-Term Capital Management forced the Fed to organize a bailout by Wall Street. Investment banks had loaned the fund billions and were among counterparties in more than $1 trillion in derivative contracts used to hedge investment risks.

That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives. In 2000, Congress passed a law keeping them unregulated.

Levitt said he went along with concerns by Greenspan and Rubin that Born’s action might throw derivatives contracts into “legal uncertainty.” He said he now regrets that he didn’t press a presidential advisory group “to take a closer look” at the issue. Rubin said in an interview that “you could have had chaos” if Born’s plan found existing derivatives contracts invalid because they weren’t traded on an exchange. Both Born and Greenspan declined to comment.

Outstanding credit-default swaps, derivative contracts used to hedge or speculate on a company’s debt, would grow to $62 trillion from $631 billion in 2001. While the swaps spread risk, as intended, they also helped spread fear. Ninety percent of the trades were concentrated in the hands of 17 banks, according to the Federal Reserve Bank of New York. That left them exposed to losses if one failed, as Lehman Brothers did in September, and contributed to the unwillingness to lend to each other that’s at the center of the recent credit squeeze.

Its worth reading in its entirety . . .

>

Source:
Greenspan Slept as Off-Books Debt Escaped Scrutiny
Alan Katz and Ian Katz
Bloomberg, Oct. 30 2008

http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aYJZOB_gZi0I

Category: Bailouts, Credit, Derivatives, Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “While Greenspan Slept”

  1. Steve Barry says:

    Heard Levitt say this on Bloomberg radio as well…his main regret was not pushing harder for that derivative regulation.

    Seems like most mainstream economists are now on the same page…we are in a recession, it maybe the worst one in a generation…but it will magically stop short of depression.

  2. VennData says:

    There hasn’t been a fail on the CDS. Having them off-exchange hasn’t created a problem. Now it’s probably a good idea to get them on exchange. But the Lehman disaster never happened. The AIG disaster never happened (and they were counter parties to the complex world of CDS hedging where you have to hedge your counter party.)

    The problem was the leverage in “too big too fail” institutions. You can change leverage rules. The fight of the century would be trying to get rid of institutions that are too big to fail. But that is really the solution: a diverse ecology of many small institutions, none of which are too big to fail.

  3. loan shark says:

    Is it possible that ‘regulation’, or the lack thereof, is not the problem but the regulators? Friedman may have been on to something.

  4. Winston Munn says:

    Would anyone buy homeowner’s insurance or car insurance from an insurance company that had no mandated loss reserves?

    The concept of regulation is not to limit transactions but to create parameters and safegaurds for those who transact – creating an environment of transparancy that should increase transactions.

    The only ones who strenuously argue against having laws are the outlaws.

  5. Loan Shark:
    Of course. Even if there had been laws on the books, it is doubtful Greenspan or anyone in this current administration would bother enforcing them. Hell, Bush thinks he runs an imperial presidency. Call me though when Republicans(and some Democrats) believe in enforcing the laws on the books when it pertains to them and their “friends”.

  6. Venn,

    you state: “But the Lehman disaster never happened. The AIG disaster never happened…”

    how do you know that those transactions, the CDSs, were allowed to unwind organically?

    though, with this: “a diverse ecology of many small institutions, none of which are too big to fail.”, I agree, but wouldn’t that be contra to the existence of the FedRes, as well?

    past that, it is, too easy to overlook this: “Congress is likely to shake up bank and securities regulation, giving the Federal Reserve more power.

    “I wouldn’t be surprised if the Fed ends up officially becoming our systemic-risk regulator,” said Robert Litan, an economist at the Brookings Institution in Washington. “–from the link

    and, “Banks have lobbied on the issue since at least the early 1980s, said Timothy Lucas, who was at the FASB for more than two decades starting in 1979.

    “I think we were sold a bill of goods” by banks on some off-the-books structures, Lucas said. “, ibid.

    and, “FASB was “under intense pressure from industry,” Alan Blinder, a former Federal Reserve Board vice chairman and now a Princeton University professor, said in an interview.

    “It’s fair to say that the industry and the regulatory community alike failed to look through the off-balance-sheet entities with a skeptical eye and see the extent of what they might be on the hook for in a bad-case scenario,” Blinder said.

    That view is shared by Susan Bies, a Federal Reserve Board governor from 2001 to 2007.

    “The No. 1 reason we’re in this crisis is the deterioration of underwriting of mortgage loans,” Bies said. “What has made it worse is the lack of transparency in disclosures of the exact nature of assets both on and off the books. We need a clearer description of what potential exposures are out there.” “, ibid.

    on the way to: “While Greenspan Slept”, though, I guess we have to remember that: “He did it ALL by himself”, if we are to retain our ‘Reindeer Games’-access Card..

  7. sellthekids says:

    when you speak of Alan Greenspan, Arthur Levitt and Robert Rubin in regards to the CDS blowup, it is important to mention Brooksley Born. those three men (as well as others) chose to ignore her insightful questions and her pleas for regulation of the OTC CDS market.

    the rest is history.

    http://www.thenation.com/blogs/edcut/370925/the_woman_greenspan_rubin_summers_silenced

    http://www.dcbar.org/for_lawyers/resources/legends_in_the_law/born.cfm

    –bcd

  8. -bcd

    that’s a very good point..it’s something I’ve been asking my ‘Feminista’ “Friends”, towit: where are you in supporting Brooksley Born? Why are you silent about Naomi Wolf? Where’s the love for Plame?, et al., etc..

    There’s never an answer. They cannot say: “We’d lose our Foundation Funding if we spoke the Truth, it’s all about ‘Divide ‘n Conquer’”..yet, there you have it.

    and, don’t even try to ask about Sibel Edmonds..

  9. James says:

    This subject was discussed previously at length in the New York Times on October 8, “Taking Hard New Look at a Greenspan Legacy” here:

    http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html

    ~~~

    BR: Discussed in loving detail here:

    http://www.ritholtz.com/blog/2008/10/deconstructing-greenspan/

  10. Whammer says:

    Learn something here every day……… Never heard of Brooksley Born before. Mark E. Hoffer, I might be dense, but I’m not sure what you’re getting at re your Feminista friends and Born, Wolf, Plame, and Sibel Edmonds. You’re saying they aren’t sticking up for these women because it would threaten their foundations?

    Hmmm……..

    Meanwhile, when I see that credit default swaps grew by a factor of 100 since 2001, I can only come to the conclusion that it is the CRA’s fault ;-).

  11. Whammer,

    I’ll try this again, I had another post ‘awaiting moderation’, but it was ‘memory holed’–WP must be still working itself in..

    Though, with this: “You’re saying they aren’t sticking up for these women because it would threaten their foundations?”, Close, and, more broadly, yes.

    More specifically, many of those groups would risk losing their funding, much of which is provided by Foundations, if they started backing the wrong ‘pony’.

    This woman: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=camille+paglia is a good contra example of the, above mentioned, Foundation Feminists..