As for methodology, the study included a survey of 14 major U.S. OTC derivatives dealers, chosen because they had “the highest levels of derivatives activity in their respective industries.” (A fifteenth refused to respond.) The list: Bank of America, Bankers Trust Co., Chase Manhattan, Chemical Bank, Citibank, First Chicago, General Re, Goldman Sachs, JP Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Prudential, Salomon Brothers.
This is a pretty comprehensive list of the current crippled or dead.
By way of context, the GAO study came at a time of concern over derivatives and wasn’t the only of its kind. It followed other significant reports, including two in 1993: one by the Group of Thirty and one by the Office of the Comptroller of the Currency along with the Federal Reserve. But the GAO, while nodding to these efforts, essentially called them inadequate.
As we just mentioned, it is hard not to notice that industry executives, regulators and the press often seemed to work in concert. But we want to clarify that point: We aren’t making conspiracy accusations here, we are just saying that regulators and industry executives by and large took the same anti-regulatory line—and then the press chose to pass along these thoughts rather than examine them.
Let’s start by looking at the, rather predictable, industry reaction to the report.
The GAO report so worried industry executives that they took aim and fired before it even came out. A February 17, 1994, Reuters piece, headlined “U.S. study sparks fears in derivatives industry,” told us:
Derivatives players and authorities alike are growing edgy about a planned report by the U.S. General Accounting Office (GAO), bankers and officials said.
Then:
Amid increasing publicity of the potential risks from derivatives’ alarming growth, many fear the report will recommend unnecessary or unwieldy regulation.
‘Some are concerned that the GAO report could be used as a predicate for legislation of the market,’ said one market authority attending the conference.
In addition to frontal attack, another industry strategy was to downplay the importance of the study before anyone even knew precisely what was in it. March 18, 1994, Reuters announced “Derivatives focus sparks reform movement,” and informed us:
Explosive growth in over-the-counter derivatives markets has stoked fears about the potential risks they pose to the financial system, fuelling a debate about the need to tighten controls on the largely unregulated instruments.
But policymakers and executives, speaking at an industry conference here, say the heightened focus has already produced initiatives that could preempt the need for comprehensive new laws and changes in the current regulatory structure.
And as for potential new regulation, ideas for which were already floating around, well:
regulators and congressional aides alike say those legislative proposals may serve mainly to sound a note of caution rather than to impose onerous new requirements on the hugely successful markets.
Meanwhile, regulators were sounding uncannily like the industry they were supposed to be regulating, as a March 25, 1994, Dow Jones piece made clear:
Securities and Exchange Commission Commissioner J. Carter Beese urged players in the derivatives market to take meaningful steps toward risk management standards in order to forestall further congressional regulation of their market.
Speaking at an American Stock Exchange options and derivatives conference here, Beese said market factors might ‘force the hand of Congress’ to enact ‘heavy-handed’ legislation that could harm the derivatives market. He said if the industry moved toward widened financial disclosure and other risk management steps, Congress might not feel compelled to burden derivatives players with further
regulation after the General Accounting Office releases a report on the subject later this spring. The GAO report, he said, ‘will be tough, will err on the side of prudence and likely will call for legislation.’
With friends like these… And Beese wasn’t finished:
Beese said attempting a ‘quick-fix’ solution to perceived dangers in the derivatives market could lead to ‘regulatory arbitrage,’ in which market participants move their business to less-regulated locales out of regulators’ reach.

Excellent work. I didn't know these reports existed. Thanks for unearthing them. Now, I wonder, what are these people who got it right 15 years ago saying now?
#1 Posted by edward ericson jr., CJR on Tue 10 Mar 2009 at 05:51 PM
i just started this story but right off the bat it seems the gao is constantly on point, how are they able to do such good work when it seems every one else in government cannot?
#2 Posted by ian, CJR on Tue 10 Mar 2009 at 09:57 PM
i just started this story but right off the bat it seems the gao is constantly on point, how are they able to do such good work when it seems every one else in government cannot?
#3 Posted by ian, CJR on Tue 10 Mar 2009 at 09:58 PM
my second thought, still on page one, is what other reports are collecting dust at gao?
#4 Posted by ian, CJR on Wed 11 Mar 2009 at 09:06 AM
Hell of a post, Elinore.
#5 Posted by 9brandon, CJR on Wed 11 Mar 2009 at 10:58 AM
Sure, it's all good to know. But this is hindsight. Why was no red flag raised by the Columbia Journalism Review when this report was initially published? With all the other media outlets? Excellence in journalism seems to be lumped in with sound bites and who has the loudest, sharpest bark. Not at all the one with wisdom and leadership in his mind and heart. There are also less and less voices out there. I do not know how this scenario will end, but am concerned about it..
#6 Posted by Maria, CJR on Mon 16 Mar 2009 at 11:10 AM
I checked the NYTimes archive for stories citing Buffet's derivatives-as-WMD remark. Other than reporting Greenspan's quick pooh-pooh, there was essentially nothing between the remark itself (March 2003) and the beginning of the MBS/derivatives crash (Fall 2007).
So, where was the NYTimes? Why did no reporter/columnist/feature writer pick up on a dramatic warning by America's most prestigious financier/investor for 3.5 years and ask -- hey, what the heck does he mean?
#7 Posted by David Lewis, CJR on Mon 16 Mar 2009 at 11:19 AM
Maria, I had it in November of 1999. Here is an alternet reprint from the spring of 2000. The Hartford Advocate didn't (and doesn't) have much reach though. Sorry.
http://www.alternet.org/story/658/one_bank_under_god/
#8 Posted by edward ericson jr., CJR on Mon 16 Mar 2009 at 12:41 PM
As the one who directed the 1994 and 1996 GAO reports, I can give you an earful about what is going on now. Perhaps Columbia could invite Alan Greemspan and me up for a symposium where we could continue our debate.
#9 Posted by James Bothwell, CJR on Wed 18 Mar 2009 at 02:51 PM
Mr. Bothwell, I read this story and your comment and would really appreciate corresponding with you.
friedlandjt@yahoo.com
#10 Posted by Joel Friedland, CJR on Thu 26 Mar 2009 at 04:25 PM
Every now and then I sit down to focus my efforts on continuing to see and chart just how far down the rabbit hole goes. I've given up tennis. This is my new pastime.
I awoke this morning with refreshed vigor to be rewarded with knowledge of Brooksley Born, knowledge which was new to me. More digging led me to the work of James Bothwell.
I, too, often wonder about where are the people with firsthand knowledge who counter mainstream speak at the time events are in the making rather than years later.
I've been putting together a list of names of go-to people who have the insight and experience for getting right to the chase, obviating the need to recognize the existence of even the least-tainted mainstream voice. Born and Bothwell have been add to that list.
If there is a "red-pill" mailing list of any kind, please add me (esantoro AT waldenbags.com).
In these trying times, it is good to know that there are a hell of a lot of great Americans. These people are so busy doing the real work that it takes years to find out just who they are.
Thank you, James Bothwell, for the work you do.
#11 Posted by Ed Santoro, CJR on Sun 18 Oct 2009 at 03:01 PM
Ed,
For more from us on this, see our Audit Interview with James Bothwell from July.
#12 Posted by Ryan Chittum, CJR on Sun 18 Oct 2009 at 03:53 PM
Thanks, Ryan. Read it and filed it. Now I'm on to Russ Baker's "Family of Secrets." Nothing turns up in CJR search for "Russ Baker." We need to change that.
It's time for a new set of those Friendly Dictator Trading Cards, but this time it's not the usual suspects--no, sir!
-- Rock the Pequod
#13 Posted by Ed Santoro, CJR on Thu 29 Oct 2009 at 01:38 PM
When a 10% default in derivatives market is equal to the worlds GDP ...Houston we have a problem
#14 Posted by otcnuclear, CJR on Sun 6 Jun 2010 at 05:42 PM