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