‘We are informed that the original draft, when it was sent to the politicians who commissioned it, was rejected … they just said it’s not negative enough,’ Malcolm Basing said of a report released in Washington on Wednesday by the U.S. General Accounting Office.

‘That gives you a flavour of what is going on,’ Mr. Basing, a past chairman of the International Swap Dealers Association—the key derivatives trade association—told a conference on derivatives.

The Washington Post’s editorial page seems not to have read the actual report, because it is hard to see how a reasonable reader could emerge with the following conclusion:

Derivatives have come to symbolize everything that Washington finds spooky, incomprehensible and menacing about the financial markets. Congress, bruised by the costs of cleaning up the S&L fiasco, wonders uneasily whether the rapid growth of trading in derivatives will produce similar grief. At its request the General Accounting Office has published a report that is, on the whole, reassuring. It suggests some improvements in regulation but rings no alarm bells. As it says, derivatives serve a very useful purpose.

If this were the obvious reading of the report, the derivatives industry would hardly have been so up in arms about it.

The rough climate soon got even rougher for the GAO, thanks in no small part to criticism by Fed Chairman Alan Greenspan and an easily convinced press. By late May, the press was less interested in the report itself than in regulators’ ongoing criticisms of it. Most notable was Greenspan, who continued to promote an anti-regulatory agenda. Here is the AP, May 25:

Derivatives dealings by banks and securities firms are unlikely to lead to losses requiring a taxpayer bailout, Federal Reserve Chairman Alan Greenspan said Wednesday.

Greenspan’s comments, widely disseminated, are important because mere days after the report came out, they played a key role in ushering in its demise. Here is Reuters, also May 25:

Federal Reserve Chairman Alan Greenspan and top regulators Wednesday defended their role in regulating derivatives and downplayed the danger of the $12 trillion market ever triggering a financial disaster.

The regulators told a House panel that new laws are not needed to rein in the market and hastily passed ones could do more harm than good—though the head of the Securities and Exchange Commission left open the door to new legislation.

Just a week ago, a two-year congressional study called for new laws, warning that the complex financial instruments pose a serious threat to the financial system and that a market upheaval could force a taxpayer-funded bailout. Lawmakers have responded with a bevy of proposals.

Greenspan, however, said regulators appear to be ‘ahead of the curve’ in keeping an eye on the market and legislative remedies are ‘neither necessary nor desirable at this time.’ He said the odds for a market meltdown were ‘remote.’

Agence France-Presse the following day gave us a sense of the army arrayed against the GAO:

The GAO report urged legislation to expand supervision and control of the derivatives activities of brokerage firms and insurance companies.

The idea drew opposition from the interested companies, as well as from officials of the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation (FDIC) who testified Wednesday before a House of Representatives subcommittee.

Such corrective legislation ‘is neither necessary nor desirable at this time,’ said Fed Chairman Alan Greenspan. Any new legislation, absent broader reform, ‘could actually increase risks in the US financial system’ and damage the entire system, he said.

Look, we are not saying this is easy. No one was going to serve the derivatives story to the press on a silver platter. The press itself needed to gauge the importance of the GAO report and the importance of industry and regulator criticism. The fact is, the press got that estimation wrong, and the report itself fell by the wayside as criticism mounted.

With the imprimatur of Greenspan, Dow Jones pretty much dismissed the report by June 1, observing:

The punch line of the General Accounting Office’s recent report on derivative financial products was supposed to be that a derivatives-spawned financial debacle could trigger a taxpayer bailout.

Punch line? Turns out the joke’s on us, Dow Jones. The piece continues:

However, now that the GAO report has been issued and hearings have been held, Rep. Edward Markey, D-Mass., a leading proponent of legislation to minimize derivatives risks, is suggesting that legislation might not come until the fall of 1996, if then.
Federal Reserve Chairman Alan Greenspan was asked at a derivatives hearing before Markey’s House Telecommunications and Finance Subcommittee last week to assess the chances that a derivatives-caused mess might lead to a taxpayer bailout.

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