‘The sky is not falling,’ declared ex-Securities and Exchange Commission Chairman Richard Breeden, now chairman of the Financial Services Group of Coopers & Lybrand, at a House subcommittee hearing attended by a batch of lobbyists anxious to ward off derivatives legislation.
Former New York Federal Reserve Bank President E. Gerald Corrigan, now with Goldman, Sachs & Co.—who not long ago warned that derivatives might be introducing new elements of risk into the financial system—joined Breeden in urging Congress to forego trying to enact reforms for derivatives.
And then the May 14 issue of The Economist really went to bat for the anti-regulatory camp, with an almost 3,000-word piece on derivatives. Here is the synopsis:
Regulators worry that huge growth in options, futures, swaps and other derivatives threatens the stability of the whole financial system. To the extent it does, regulation is warranted. But that extent is small, and otherwise the markets will judge the risks better than regulators can.
The Economist took on legislators whose concern over derivatives had led to both the GAO study and a variety of legislative proposals to curb derivatives:
One reason for America’s wariness is that legislators there want to improve on a hitherto poor record of anticipating financial disasters. They failed to foresee either the thrift debacle or the collapse of the junk bond market in the 1980s. Derivatives now offer an attractive target: they are a little-understood market with very big numbers attached. But that does not necessarily make them a threat to the system. On the contrary, used properly, derivatives can spread and even reduce risk in absolute terms rather than increase it.
The piece goes on to knowingly tell us:
In fact, because derivatives contracts are a way of spreading risk, they should improve rather than damage the aggregate position of companies linked by them.
Nice theory. Too bad it turned out to be utterly wrong.
But as much resistance as there was before the report came out, it paled in comparison to the response to its publication. Then the industry, with some help from some influential federal regulators, really tore it up.
Dow Jones, May 18:
Fast on the heels of a General Accounting Office recommendation that Congress enact legislation to lessen perceived financial system risks arising from derivatives, six leading financial trade groups, including the Public Securities Association and Securities Industry Association, stated their opposition to any derivatives legislation.
Other trade groups joining the statement of opposition to legislation on derivatives were the American Bankers Association, Futures Industry Association, the Bankers Roundtable, and the International Swaps & Derivatives Association.
In a separate piece the same day, Dow Jones informed us:
Securities & Exchange Commission Chairman Arthur Levitt said that additional regulation of derivatives is not necessary ‘at this point.’
In response to reporters’ questions on today’s release of the General Accounting Office study of derivatives, Levitt said, ‘I’m not prepared to go out and call for more government regulation today.’ Levitt was speaking at a Investment Company Institute conference here.
And Levitt wasn’t the only government official making the round of industry conferences. Here is Dow Jones the following day:
Treasury Secretary Lloyd Bentsen said the federal government must not be ‘heavy-handed’ in dealing with derivatives.
‘The attention focused on these issues by appropriate committees of Congress and the GAO can also be constructive. However, I believe we need to be careful about interfering in markets in too heavy-handed a way.’
Bentsen’s remarks were contained in text of a speech he is giving before a National Association of Securities Dealers conference here.
Where was the press in all of this? Generally abdicating its imperative to shape the story—to sift through disparate pieces of information and put them in their places—and employing instead a false evenhandedness.
Let us explain.
Some articles merely summarized the report, avoiding the issue of significance entirely. But often reporters brought in opposing voices. That is standard, of course, and not a problem in and of itself. The problem is that reporters seemed at a loss over what weight to give opposition to the report. The result was that they gave it equal time—or more. And so the GAO, which had spent two years making itself an expert on derivatives, became just one voice among many, only to be gradually shouted down by a persistent opposition.