In reality, the GAO was the authority here, and unlike many of its opponents, didn’t have a horse in the race. Some opponents of the bill called the document politically biased in an effort to discredit it. But the problem with that accusation, which seems to have been aimed at Democrats, a few of whose members were at the forefront of the call for legislative action, is that—while solutions may have differed across party lines—concern over derivatives was not entirely limited to one party.

Besides, the GAO has earned considerable credibility over the years. Despite years of excessive government secrecy, they are one of the few government sources we can still count on for real information.

Nonetheless, here is the WSJ May 18, 1994:

The GAO report drops into a seething pool of vested interests, including regulators, legislators and dealers, all of whom have already offered their own, sometimes conflicting answers to three basic questions: What are derivatives? How risky are they? And what, if anything, should be done to regulate them?

There is far too little weighting of the various parties here. It is just plain wrong to equate all these “vested interests.” As if the Congress and private industry are two equivalent, equally self-serving parties. Even equating the industry and regulators is too simple, although the two groups were way too intertwined.

Manifesting that unhealthy connection, the industry and regulators continued to hammer away at the GAO. Here is Dow Jones, May 19:

Yesterday, the GAO released a long-awaited study of derivatives, which drew strong criticism from industry representatives. Market participants and regulators questioned the underlying premise of the report, which assumes that the increasingly close linkage among various financial markets, including derivatives, threatens widespread bank losses in the event of one failure.

Yet the banking system has withstood an assortment of crises in recent years, noted Steven Hellinger, director of research for the New York State Banking Department.

On May 19, the AP presented the problem as one of public perception:

Many fear these hybrid concoctions traded by banks and brokers could trigger a financial crisis, even though most are perfectly safe. But that’s not reassuring to those who remember how the banking industry slogged through the junk bond and commercial loan crisis, risking big sums of other people’s money.

And then:

Bankers complain that recent cases of companies that lost millions of dollars on soured derivatives deals have received widespread coverage, while stories about companies that made money on derivatives seldom get written.

And Reuters, the same day, gave us anonymous criticism:

A major U.S. report warning that trade in financial derivatives poses a dangerous threat to the international financial system is exaggerated, a senior European monetary source said.

The source, close to international banking regulators, told Reuters that the report’s proposals for tougher regulation of trade in derivatives would plug some supervisory loopholes but not all of them were feasible.

The Chicago Sun Times weighed in, again May 19, with the “defenders” of derivatives:

In response to a long-awaited federal government report on derivatives, leaders of Chicago’s futures markets warned against further regulation of the financial instruments.

‘We would rail against any additional regulation,’ said Jack Sandner, chairman of the Chicago Mercantile Exchange. ‘No one has made a case that there’s a catastrophe here.’

Perhaps he didn’t read the GAO report. And yet again, it is beyond misleading to present the opinions of industry executives and the research of the GAO as equally authoritative, as this piece does.

Some more false balance, this time from the WSJ, May 19 again:

A federal study calling for tighter controls on the derivatives market was sharply criticized by the securities and commercial banking industries, which said the proposals would increase costs and reduce the availability of such financial products.
The General Accounting Office, Congress’s investigative arm, formally released its long-awaited study yesterday, calling for formal regulation of securities dealers and insurance companies that deal in derivatives, as well as for improved disclosure and accounting treatment. The report says that gaps in financial regulation could lead to a system-wide problem—and perhaps a federally financed bailout—if a major dealer fails. And it says the Securities and Exchange Commission should demand that public corporations establish requirements for corporate audits.

‘We are convinced that any legislation having these effects will harm the American economy,’ six leading financial trade associations said in a joint statement. ‘Therefore, we strongly oppose such proposals.’

The Globe and Mail May 20 brought up charges of politicizing the issue, in a piece headlined “Derivatives Backlash Overdone” and based on rumor:

A call for broad regulation of the booming financial derivatives market by an arm of the U.S. Congress is a highly political document, not an objective academic study, the president of Swiss Bank Corp. (Canada) said yesterday.

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