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.

Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.