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.
‘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.