"Both give rise to a systematic aversion to government regulation of private economic activity. For him, recognition that the workings of such markets sometimes destroy asset values, jobs, or even entire industries is still not ground for interference in the economy in the aggregate, or with individual transactions to which two or more private parties voluntarily agree."
In a "state of shocked disbelief," the maestro of the US economy testified to Congress that he also "contributed" to the economy's recent downfall; but, but, he did not cause it. He testified that "he made a mistake in believing that banks operating in their own self interest would also protect their shareholder and depositor’s interests."
"My Question for you is simple. Were you wrong? (Waxman); "Well partially," the former Fed Chairman answered. Even as billions of dollars are pumped into the economy to maintain liquidity and prevent the nation and the world from plunging into a depression, Greenspan will not admit his turning a blind eye to Derivatives, telling the world to look elsewhere to invest, and keeping Fed interest rates at 1% for too long as he led the largest economy of the world off a cliff. Hard to belief this testimony and his philosophy, it is ok to have these types of recessions as long as there is no regulation to prevent them from occurring as a result of this market.
April 1998 brought Greenspan, Rubin, and Levitt together, Wall Street’s finest, to face off against Brooksley Born, the chairman for the Commodities Futures Trade Commission and a former Washington attorney. On the short list to become Attorney General in 1992 and being passed by, she accepted an appointment to the CFTC. Her interest in the regulation of derivatives was to shed light on the shadow markets of derivatives, a financial instrument deriving their value from bonds and being a cushion or gamble against risk. Millions of them existed in 1998; but, their was no clearing house for them to give them the normal transparency of the stock market nor was there any place holding the collateral in case of default. The three caballeros were there to tell Born to back off.
Born's position was to give transparency to a class of derivatives tied to fluctuations in interest and currency. The lack of information on these financial instruments allowed traders to take positions in the market place potentially threatening it or the economy without federal regulatory knowledge. The same economic brain trust of the US economy that made its wealth and power from Wall Street decried Born's enthusiastic testimony for regulatory authority before Congress as being misguided and unnecessary in light of a market place guided by professionals. Deputy Treasury Secretary Lawrence Summers described her efforts before Congress as "casting a shadow of regulatory uncertainty over an otherwise thriving market."
The powers of the three did not persuade Born to give up her push to have oversight of the shadowy Derivatives Market. Publicly they proposed splitting up the responsibilities of the CFTC between the Fed, the Treasury, and the SEC. 17 times Born testified in front of Congress giving them the same message of danger and also compromising that the oversight would apply to new derivatives and the old ones would be left as they were. Wall Street was afraid that the courts could nullify contracts leaving the one or both parties without recourse in case of default. Pointing to the "Long Term Capital Management" fund failure as an example of what could take place, she warned:
"'This episode should serve as a wake-up call about the unknown risks that the over-the-counter derivatives market may pose to the U.S. economy and to financial stability around the world.' She spoke of an 'immediate and pressing need to address whether there are unacceptable regulatory gaps.'"
LTCM over leveraged on the derivative side of its books and when calls were made for more collateral, it collapsed leaving a $4 billion debt. "The off-balance sheet leverage was 100 to 1 or 200 to 1 -- I don't know how to calculate it," Peter Fisher, a senior Fed official, told Greenspan and other Fed governors at a Sept. 29, 1998, meeting, according to the transcript.
Congress reacted to the failure of LTCM and Born's push by placing a 6 month moratorium on any actions by the CFTC to regulate the Derivatives Market. Born was isolated by the moratorium. A Presidential Working Commission (Born was a member) report pointed out the dangers of over leveraging by LTCM and called for financial reporting by brokerages "unregulated and off books affiliates" to the government the extent of their financial risk. Greenspan dissented on the implementation of the recommendation.
In May 1999, Born resigned and left the CFTC. Citing that any regulation by the CFTC, Greenspan, Levitt and Rubin put forth that such regulation would hamper the developments of such markets in the US and create legal issues. In June 2000, Senator Gramm of Texas called for regulatory relief by sponsoring a bill that eliminated any SEC or CFTC regulatory capability of the Derivatives market. In 2000, the Gramm sponsored Commodity Futures Modernization Act passed as a rider to an omnibus spending bill. It barred the SEC and the CFTC from regulating the Derivative Market leaving the SEC with the capability to investigate for insider trading and a provision for a market run clearing house. The clearing house was little more than a paper tiger.
It is interesting to watch Greenspan sit or stand in front of Congress and refuse to accept more of the responsibility for the economic crisis he created by leaving interest rates at 1% for too long, encouraging subprime lending (the bulk of which went to non-home buying and Alt-A loans) and then raising interest rates shortly thereafter, and by blocking any type of regulation or oversight of the volatile and speculative Derivative Market that was little better than placing bets. The bulk of today's issues lie with the maestro of the economy Alan Greenspan. If the crisis was not so serious to the "Joe-Six-Packs," the small business "Joe-the-Plumbers," the Suzie Housewives, and the "Brenda-Business-Women of the world, I am sure Brooksley Born would have a grin on her face.
Some Comments from some of the characters who helped bring about this crisis:
- "Greenspan shot back that CFTC regulation was superfluous; existing laws were enough.’Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary,' he said. 'Regulation that serves no useful purpose hinders the efficiency of markets to enlarge standards of living.'"
- "Senator Gramm opened a June 21, 2000 hearing calling for 'regulatory relief:' 'I think we would do well to remember the Lincoln adage that to ask a society to live under old and outmoded laws -- and I think you could say the same about regulation -- is like asking a man to wear the same clothes he wore when he was a boy.'"
- "Levitt's thoughts: 'In fairness, while Summers and Rubin and I certainly gave in to this, we were not in the same camp as the Fed,' he said.’The Fed was really adamantly opposed to any form of regulation whatsoever. I guess if I had to do it over again, I certainly would have pushed for some way to give greater transparency to products which turned out to be injurious to our markets.'"
- "Goldschmid, the former SEC commissioner and the agency's general counsel under Levitt: 'In hindsight, there's no question that we would have been better off if we had been regulating derivatives -- and had a clearinghouse for it.'"
- "On Sept. 26, 2008 SEC Chairman Christopher Cox shut down the program. Cox, a longtime champion of deregulation, said in a statement posted on the SEC's Web site, 'the last six months
As culled from: <link> “What Went Wrong” Washington Post,” October 15, 2008
