TA: This was a Democratic administration. That’s pretty remarkable, right? Why was the administration so lined up against regulating derivatives?

JB: Because it was a very profitable business and it was growing dramatically, even back then. The false argument they give you is that if you regulate you’re going to drive the business offshore. They’ve been saying that for decades and we really haven’t seen much evidence of it, but it’s connections to Wall Street. Bob Rubin. The ties are deep.

TA: It’s remarkable to look back in this context and see a Democratic administration just shoot down and marshal all its forces against you. I mean, you guys weren’t saying “eliminate derivatives.” You were saying put them on exchanges and have disclosure, things like that.

JB: Yes. If you read our report, it was very well balanced. We talk about the benefits of derivatives for risk-sharing and risk-spreading.

TA: Do you still think—in light of recent events—that they still have a place?

JB: Absolutely, but you need regulatory oversight. You need controls over undue concentrations of market risk, credit risk. Make sure there’s adequate capital.

TA: In that report you were talking about how you thought that derivatives could increase risk while everyone was talking that derivatives would disperse risk throughout the system. You said “maybe not”, especially if you have these guys that are so big that one of them fails and causes a chain reaction. Why were you the only one saying that?

JB: I’d attribute it to my good education—UC Berkeley (laughs), and my intuition, and the analysis of the marketplace.

You saw a marketplace there that was highly concentrated in six major dealers. You saw a marketplace where there was no transparency. Those dealers knew who their counterparties were, but did not know who their counterparties’ counterparties were. There was nobody with the overall view of what that credit concentration and credit risk was.

That’s what we were calling for regulation to do—to get information about all these counterparties’ exposures. Who was exposed to whom? It was obvious to me. We have this system of bank examiners—I don’t mean to disparage bank examiners, but they can be focused on the minutiae: “Are these forms being filled out correctly?” and they just miss the big picture of the big risk exposure and the functioning of a bank and its risk management. And the central banks allowing the capital to be set by the banks’ own internal models is just incredible.

TA: What would have happened had your recommendations been implemented in ‘94?

JB: AIG wouldn’t have happened.

TA: If AIG hadn’t happened—they were taking much of the super-senior risk and concentrating it in one place, you can follow it down the line, you would have much less lending to subprime housing, for instance. But you guys at that point were talking about interest-rate swaps:

JB: The credit-derivatives market was just being developed as we issued our report. We knew about it and we knew about AIG. Matter of fact, when you read about the regulatory gaps with the insurance companies, that’s what we had in mind.

We went up to meet with (CEO) Hank Greenberg up at his office at AIG to talk about our report and what we were recommending. He said “You can’t tell me anything about risk management. I’ve got control of this. It was out of control, but I’ve got control of it now. I have nothing to learn from you.”

The other thing that kills me—after our report came out and I was director of this group of about 120 people—some people in New York, Chicago, San Francisco—most in Washington. They did an amazing amount of work in the four or five years I headed that group. When Republicans took over the House, they cut GAO’s budget like 40 percent, partly I think as payback. They pretty much gutted the GAO’s ability to do this kind of work.

TA: Has it ever recovered?

JB: No.

TA: So if you were at GAO right now and were asked to do this kind of report you couldn’t do it?

JB: No, I don’t think you could do it, unfortunately.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.