Greenspan Could Have Prevented the Current Financial Meltdown

[Retire Soon]

George Soros once said that he avoided using derivatives, "because we really don't understand how they work." Warren Buffets believed that derivatives were, "financial weapons of mass destruction." Felix Rohatyn, who been given credit for saving New York from financial ruin in the 70's described these financial contracts as, "hydrogen bombs."

On the other hand, Alan Greenspan had a completely opposing view and fought fiercely for continued use of derivatives. In 1997, The Commodity Futures Trading Commission began looking into the regulation of derivavtives and believed that this type of opaque trading could seriously threaten our economy unless their were both greater disclosure of trades and reserves.

The views of the Futures Trading Commission were sharply contested by Greenspan and then Treasury Secretary, Robert Rubin. These two individuals along with Arthur Levitt convinced congress to avoid listening to the views of this commission until, "other regulators developed their own recommendations."



Shortly thereafter, hedge fund, Long Term Capital Management nearly collapsed. Congress then stripped the Futures Trading Commission's regulatory authority for six months. In 1999, Greenspan and Rubin recommended to congress that the CFTC be permanently stripped of its authority to regulate derivatives.

As the global economy increasingly becomes worse, because of the housing crisis and lack of credit availability, derivative now magnify the problem. The derivatives market is now an astounding $531 trillion, up from $106 trillion in 2002.

According to an article in the New York Times, today's financial crisis could have been, "muted or prevented" if Greenspan had acted differently during his tenure as Federal Reserve Chairman from 1987 to 2006. It's no wonder that Mr. Greenspan has seldom accepted invitations for speaking engagements over the past several months.

http://www.nytimes.com/2008/10/09/b... Look at Greenspans Legacy&st=cse&oref=slogin

 

[REWahoo]

I've been telling you it was all Alan Greenspan's fault...

http://www.early-retirement.org/forums/f28/will-the-fed-cut-rates-now-39248.html#post723148

 

[socca]

Another quote from Mr. Morris' book ( see this thread: http://www.early-retirement.org/forums/f28/book-recommendation-39658.html )

It may be worth noting that as the [British Financial Services Authority] was completing its report [in 2006], Alan Greenspan was still singing the praises of the new credit technologies for their role in "lay[ing] off all the risk of highly leveraged institutions - and that's what banks are, highly leveraged institutions - on stable American and international institutions." CDOs and credit hedge funds apparently now count as "stable American and international institutions."

It would be ridiculous to isolate Greenspan as the sole cause of the meltdown. However, there's no doubt that if he had been wired differently, maybe we would have had a soft landing rather than a hard landing.

 

[riskadverse]

When Greenspan uttered his famous "irrational exuberance" phrase in late 1996 the DOW was at 6400. Had he followed through with policy, rather than empty sound bites, we might not be threated with revisiting 6400 on the DOW.

 

[ziggy29]

As I've said before -- Greenspan may have loaded the gun, but someone else had to grab it, hold it to their head and pull the trigger.

 

[REWahoo]

As I've said before -- Greenspan may have loaded the gun, but someone else had to grab it, hold it to their head and pull the trigger.

While Greenspan cheered them on:

“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, former Federal Reserve chairman, 2004

 

[Retire Soon]

"How the world's markets came to the brink of collapse"

The Washington Post corroborates the story in the New York Times about Alan Greenspan's successful role in blocking federal regulation of the derivatives market with an investigation of its own. There are currently $530 trillion invested globally in derivatives. To make sense of this number, consider that the total value of the New York Stock Exchange was $30 trillion at the end of 2007, before the recent crash.

What Went Wrong - washingtonpost.com=

Edit: oops! Original story was from the New York Times

 

[Helen]

Interesting article, Retire Soon.

Here is more on Brooksley Born:

Legends in the Law: Brooksley Born

 

[FinanceDude]

George Soros once said that he avoided using derivatives, "because we really don't understand how they work." Warren Buffets believed that derivatives were, "financial weapons of mass destruction." Felix Rohatyn, who been given credit for saving New York from financial ruin in the 70's described these financial contracts as, "hydrogen bombs."

On the other hand, Alan Greenspan had a completely opposing view and fought fiercely for continued use of derivatives. In 1997, The Commodity Futures Trading Commission began looking into the regulation of derivavtives and believed that this type of opaque trading could seriously threaten our economy unless their were both greater disclosure of trades and reserves.

The views of the Futures Trading Commission were sharply contested by Greenspan and then Treasury Secretary, Robert Rubin. These two individuals along with Arthur Levitt convinced congress to avoid listening to the views of this commission until, "other regulators developed their own recommendations."



Shortly thereafter, hedge fund, Long Term Capital Management nearly collapsed. Congress then stripped the Futures Trading Commission's regulatory authority for six months. In 1999, Greenspan and Rubin recommended to congress that the CFTC be permanently stripped of its authority to regulate derivatives.

As the global economy increasingly becomes worse, because of the housing crisis and lack of credit availability, derivative now magnify the problem. The derivatives market is now an astounding $531 trillion, up from $106 trillion in 2002.

According to an article in the New York Times, today's financial crisis could have been, "muted or prevented" if Greenspan had acted differently during his tenure as Federal Reserve Chairman from 1987 to 2006. It's no wonder that Mr. Greenspan has seldom accepted invitations for speaking engagements over the past several months.

http://www.nytimes.com/2008/10/09/b... Look at Greenspans Legacy&st=cse&oref=slogin

Isn't Greenspan a Democrat? Seems unlikely for the NYT to throw him under the bus........

 

[Helen]

Here's more from Born from Oct. 15, 1998:

In conclusion, there is an immediate and pressing need to address possible regulatory protections in the OTC derivatives market. The LTCM episode not only has demonstrated the potential risks posed by the OTC derivatives market for the domestic and global economy, but also has highlighted the importance of the safeguards in place for exchange-traded futures and options. Obviously, regulation must be adapted to the particular marketplace and must address the risks to the public interest that that market poses. Thus, regulatory solutions for exchanges are not necessarily appropriate for the OTC market. Nonetheless, the markets involve similar instruments and pose many of the same risks, and our successful experience with the U.S. futures exchanges will be invaluable in the study of the OTC derivatives market.

Remarks of Chairperson Brooksley Born on "The Lessons of Long-Term Capital Management L.P," at the Chicago Kent-IIT Commodities Law Institute on October 15, 1998

 

[Rustic23]

Greenspan? Bush? Clinton? Volker? Franks? Dodd? Democrats? Republicans?

I don't care who, I care WHY! And, I don't think there is a politician in power or about to be in power that will truthfully seek the answer.

 

[audreyh1]

Isn't Greenspan a Democrat? Seems unlikely for the NYT to throw him under the bus........

NO - Greenspan was a longtime Libertarian until he became a Republican.

Audrey

 

[Retire Soon]

Alan Greenspan admitted today that he had made some mistakes in opposing regulations on mortgage securities while he was Federal Reserve Chairman:

Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers - WSJ.com

 

[Helen]

This is really worth watching:

FRONTLINE: the warning: watch the full program online | PBS

"In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008."

 

[Independent]

I'll agree that Greenspan killing the CFTC proposal on derivatives had a big impact on the current meltdown.

But let's be clear that the issue was bigger then derivatives and there were a lot more players than Greenspan. The post article goes on to talk about this meeting:

Agency’s ’04 Rule Let Banks Pile Up New Debt ... In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

The New York Times > Log In (Sorry the link requires free registration).

I think that gov't ought to protect the public interest in cases where private interests can generate big negative externalities. The dominant ideology in Manhattan/DC has been that there are no such cases. This allows financial firms to make big profits while offloading the losses to the public. It appears to me that the current Congress will do some grandstanding on executive pay, but it will be business-as-usual in all the important areas.

 

[charlie]

Derivatives were just part of the problem. Toxic assets are the root
cause and they resulted from greed by lenders and buyers inspired
by bad policy from congress and the lack of effective oversignt by
the regulators.

Cheers,

charlie

 

[Bikerdude]

Greenspan is really a "Quant" at heart. He loves math and fell in love with derivatives. He really thought they had a product that took the risk out of almost all securities. What he forgot was human nature and greed.

Greenspan has admitted in pubic he was wrong. Larry Somers, Robert Rubin, Chris Dodd, Barney Frank and Bill Clinton have yet to admit their part.

I thought the "Frontline" program mentioned in a previuos post sheds light on what happened in late the 90's. Very interesting. At the end Brooksley Born issues a chilling warning.

 

[audreyh1]

Well, he admitted it himself. He admitted that his model was wrong. He said he never imagined corporate officers/CEOs would screw their shareholders and take short term risks to line their own pockets ignoring how long term consequences might really hurt their shareholders.

Well, that was one expensive lesson! For everybody! (except for the folks who got theirs and got out already!)

Audrey

 

[audreyh1]

Greenspan has admitted in pubic he was wrong. Larry Somers, Robert Rubin, Chris Dodd, Barney Frank and Bill Clinton have yet to admit their part.

Pretty funny you would list them and not mention Phil Gramm!! - the mastermind behind modern bank deregulation and protector of unfettered use of derivatives.

And what's with the list of administration officials from the 1990s? The 2000-2008 administration officials must not have had any culpability whatsoever I guess - not the SEC Chairman, or Treasury Secretary or President. Must have just been all those democrats from the previous administration that caused a 2008 financial crisis. Yeah, right!

Audrey

 

[Bikerdude]

Pretty funny you would list them and not mention Phil Gramm!! - the mastermind behind modern bank deregulation and protector of unfettered use of derivatives.

And what's with the list of administration officials from the 1990s? The 2000-2008 administration officials must not have had any culpability whatsoever I guess - not the SEC Chairman, or Treasury Secretary or President. Must have just been all those democrats from the previous administration that caused a 2008 financial crisis. Yeah, right!

Audrey

I was just pointing out some of the key characters in the "Frontline" piece. According to Frontline in the late 90's (Bush wasn't President yet) Brooksley Born wanted to regulate the derivative market and most of the cast of characters mentioned ran her out of Washington on a rail. It is what it is. They were all aware and chose to do nothing.

 

[audreyh1]

I was just pointing out some of the key characters in the "Frontline" piece. According to Frontline in the late 90's (Bush wasn't President yet) Brooksley Born wanted to regulate the derivative market and most of the cast of characters mentioned ran her out of Washington on a rail. It is what it is. They were all aware and chose to do nothing.

And was it mentioned how Phil Gramm played a huge role in this?

Audrey

 

[Bikerdude]

And was it mentioned how Phil Gramm played a huge role in this?

Audrey

I suggest you watch the piece and draw your own conclusions.

 

[audreyh1]

I suggest you watch the piece and draw your own conclusions.

Well, I guess I'll have to figure out how to watch it. It seems from the comments that a great deal has been left out - like the massive leveraging that occurred during the 2000s when the restrictions on large investment banks were lifted, the total lack of rein in on improper lending standards.

Although Greenspan, Summers, Rubin and Levitz are singled out for particular criticism in this fine program, the list of culprits is long. Certainly near the top would be Milton Friedman, Phil Gramm and Wendy Gramm. My only reservations about the show was that it did not discuss Phil and Wendy Gramm's tireless efforts to deregulate everything in sight. Their damage to the economy started with Enron, as prime enablers of that fiasco. Alas, it did not end there.

And of course, none of this would have happened if the Glass-Steagall hadn't been repealed.

So, there were many contributions to the failure.

It wasn't just derivatives and plenty happened during the 2000s to bring on the crisis.

Audrey

 

[jdw_fire]

It seems from the comments that a great deal has been left out - like the massive leveraging that occurred during the 2000s when the restrictions on large investment banks were lifted, the total lack of rein in on improper lending standards.

...

It wasn't just derivatives and plenty happened during the 2000s to bring on the crisis.

Audrey

i am not real clear on the financial instrument that was created that converted these very risky loans into AAA rated investments but i thought they were derivatives. am i wrong?

 

[audreyh1]

I am not real clear on the financial instrument that was created that converted these very risky loans into AAA rated investments but i thought they were derivatives. am i wrong?

No, those weren't derivatives - those were CDOs - collateralized debt obligations or CMOs - collateralized mortgage obligations (both a.k.a toxic assets), that the rating agencies (in collusion - there is no doubt about that) rated as AAA based on some extremely dubious mathematical models. And then so many institutions bought these based on the ratings, even though the ratings were dubious.

Those had nothing to do with derivatives. But I think some companies used derivatives to hedge against the risk of these CDAs - realizing that there was some risk, but figuring that the derivative would save their butt - another fallacy.

It was a big insane mess.

And I really, really don't understand why the ratings agencies haven't been keelhauled over this.

Audrey