lack of oversight on derivatives

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Dave Wilson" <dave () wilson net>
Date: October 9, 2008 8:57:16 AM EDT
To: "David Farber" <dave () farber net>
Subject: lack of oversight on derivatives


Nice article the deliberate lack of oversight on derivatives in todays  
NYT:

http://tinyurl.com/4ue984
"Not only have individual financial institutions become less  
vulnerable to shocks from underlying risk factors, but also the  
financial system as a whole has become more resilient." — Alan  
Greenspan in 2004


By PETER S. GOODMAN

Published: October 8, 2008
The Reckoning

George Soros, the prominent financier, avoids using the financial  
contracts known as derivatives "because we don't really understand how  
they work." Felix G. Rohatyn, the investment banker who saved New York  
from financial catastrophe in the 1970s, described derivatives as  
potential "hydrogen bombs."
And Warren E. Buffett presciently observed five years ago that  
derivatives were "financial weapons of mass destruction, carrying  
dangers that, while now latent, are potentially lethal."

One prominent financial figure, however, has long thought otherwise.  
And his views held the greatest sway in debates about the regulation  
and use of derivatives — exotic contracts that promised to protect  
investors from losses, thereby stimulating riskier practices that led  
to the financial crisis. For more than a decade, the former Federal  
Reserve Chairman Alan Greenspan has fiercely objected whenever  
derivatives have come under scrutiny in Congress or on Wall Street.  
"What we have found over the years in the marketplace is that  
derivatives have been an extraordinarily useful vehicle to transfer  
risk from those who shouldn't be taking it to those who are willing to  
and are capable of doing so," Mr. Greenspan told the Senate Banking  
Committee in 2003. "We think it would be a mistake" to more deeply  
regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan  
recently described as "the type of wrenching financial crisis that  
comes along only once in a century," his faith in derivatives remains  
unshaken.

The problem is not that the contracts failed, he says. Rather, the  
people using them got greedy. A lack of integrity spawned the crisis,  
he argued in a speech a week ago at Georgetown University, intimating  
that those peddling derivatives were not as reliable as "the  
pharmacist who fills the prescription ordered by our physician."

But others hold a starkly different view of how global markets  
unwound, and the role that Mr. Greenspan played in setting up this  
unrest.

"Clearly, derivatives are a centerpiece of the crisis, and he was the  
leading proponent of the deregulation of derivatives," said Frank  
Partnoy, a law professor at the University of San Diego and an expert  
on financial regulation.

The derivatives market is $531 trillion, up from $106 trillion in 2002  
and a relative pittance just two decades ago. Theoretically intended  
to limit risk and ward off financial problems, the contracts instead  
have stoked uncertainty and actually spread risk amid doubts about how  
companies value them.

If Mr. Greenspan had acted differently during his tenure as Federal  
Reserve chairman from 1987 to 2006, many economists say, the current  
crisis might have been averted or muted....<snip>









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