[emphasis added] George Soros, the prominent financier, avoids using the financial contracts known as derivatives because we dont 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.
. . . .
As the long-serving chairman of the Fed, the nations most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
An examination of more than two decades of Mr. Greenspans record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nations economy to that faith.
. . . .
The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole, Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markeys committee in 1994. In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.
. . . .
Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence, he said.
But he called that possibility extremely remote, adding that risk is part of life.
Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.
. . . .
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could threaten our regulated markets or, indeed, our economy without any federal agency knowing about it, she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Borns views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market.
. . . .
In November 1999, senior regulators including Mr. Greenspan and Mr. Rubin recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through.
. . . .
You will go down as the greatest chairman in the history of the Federal Reserve Bank, declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
. . .
Mr. Greenspan said that Wall Street could be trusted. There is a very fundamental trade-off of what type of economy you wish to have, he said. You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either, he said.
. . . .
Arent you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy? asked Representative Bernard Sanders, an independent from Vermont.
No, Im not, Mr. Greenspan replied. I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically I should say, fully hedged.
