‘Negligible,’ replied Greenspan, who with that one word squeezed the air out of the GAO’s laboriously constructed bailout scenario. There was no more talk of a taxpayer bailout at the hearing, or elsewhere.
The fact is, everyone, including the press, was cowed by Greenspan’s opposition to the report, and opposition—which had an outsized voice from the beginning—was suddenly the default response. The press, choosing not to shape the story but to be shaped by it, let this happen.
Barron’s was one of the few outlets that really took a look at what was at stake here, and June 20, parsed the interests of the various parties to the debate:
[T]he guiding principle of federal regulation in this area is that if the examiner thinks the bank has good procedures in place, he will permit the bank to create its own valuations and stress tests for derivatives. Which necessarily leaves the danger that someone who talks a good game may get carte blanche, and the banks can pay talkers more than 10 times what the government can play listeners.
Moreover—let’s face it—on the political-appointee level, bank regulators tend to be people who believe that bankers know what they’re doing. Alan Greenspan himself, while in private practice, once certified that Charlie Keating and his crew were ‘seasoned and expert,’ and that under their leadership Lincoln Savings & Loan had become ‘vibrant and healthy … a financially strong institution that presents no foreseeable risk to the Federal Savings & Loan Insurance Corp.’
The piece concluded:
Until the regulators or the accountants get their act together, readers of financial statements from big bank holding companies would be wise to equip themselves with a magnifying glass to read the fine print, and a salt-shaker to sprinkle on both the balance sheet and the income statement.
This analysis makes complete sense. So why was Barron’s one of the few voices in the wilderness?
That such insight was rare meant that the GAO was reduced to repeating itself over and over, like a drunk on the street corner. Here is the GAO, as described by Dow Jones June 23, more than a month after the report came out:
A General Accounting Office official said Congress should require federal oversight of all major over-the-counter derivatives dealers to ensure the system’s safety and soundness.
In testimony before the House Banking Committee, Charles A. Bowsher, Comptroller General, said there is an ‘immediate need’ for Congress to bring currently unregulated derivatives activities of securities and insurance companies under the eye of federal regulators.
‘Given the gaps and weakness that impede regulatory preparedness for dealing with a financial crisis associated with derivatives, we recommend that Congress require federal regulation of the safety and soundness of all major U.S. OTC derivatives dealers,’ Bowsher said in his prepared remarks.
Echoing the concerns cited in a report his agency released last month, Bowsher said that the sudden failure or abrupt withdrawal from trading of any of the large derivatives dealers could cause liquidity problems in the markets and pose risks to federally insured banks and the financial system as a whole.
Woe to the prophet in his own land. And this despite the fact that derivatives estimates, according to the WSJ on August 25, 1994, were already ballooning:
By Wall Street Journal estimates, the world’s derivatives markets are far larger than most people realize and far exceed the latest assessment published by the General Accounting Office.
Total derivatives outstanding currently top $35 trillion, roughly twice the congressional agency’s estimate for year-end 1992. The numbers are based on the value of the stocks, bonds, currencies and money-market instruments that underlie these arrangements and determine their worth—measures known as open interest or ‘notional’ value. Unlike the situation in securities transactions, little or no money changes hands when most derivatives trades are initiated.
Nonetheless, coverage of the GAO report continued its anti-regulatory skew, until it tapered off to a tiny trickle—and most of that in economics journals or industry trade publications.
The issue of derivatives would come up again and again—the GAO itself put out a follow-up report in 1996, and derivatives got broader attention in 1998 when Long-Term Capital Management failed and in 2001 with the collapse of Enron—but as response to this GAO report makes clear, merely raising the issue is not necessarily much better than ignoring it.
That we are not asking the impossible is clear from two excellent derivatives stories that swim against the tide of coverage. One was a Fortune story that came out before the GAO report, and the other was a Washington Monthly piece that came out in the report’s wake.