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.

Excellent work. I didn't know these reports existed. Thanks for unearthing them. Now, I wonder, what are these people who got it right 15 years ago saying now?
#1 Posted by edward ericson jr., CJR on Tue 10 Mar 2009 at 05:51 PM
i just started this story but right off the bat it seems the gao is constantly on point, how are they able to do such good work when it seems every one else in government cannot?
#2 Posted by ian, CJR on Tue 10 Mar 2009 at 09:57 PM
i just started this story but right off the bat it seems the gao is constantly on point, how are they able to do such good work when it seems every one else in government cannot?
#3 Posted by ian, CJR on Tue 10 Mar 2009 at 09:58 PM
my second thought, still on page one, is what other reports are collecting dust at gao?
#4 Posted by ian, CJR on Wed 11 Mar 2009 at 09:06 AM
Hell of a post, Elinore.
#5 Posted by 9brandon, CJR on Wed 11 Mar 2009 at 10:58 AM
Sure, it's all good to know. But this is hindsight. Why was no red flag raised by the Columbia Journalism Review when this report was initially published? With all the other media outlets? Excellence in journalism seems to be lumped in with sound bites and who has the loudest, sharpest bark. Not at all the one with wisdom and leadership in his mind and heart. There are also less and less voices out there. I do not know how this scenario will end, but am concerned about it..
#6 Posted by Maria, CJR on Mon 16 Mar 2009 at 11:10 AM
I checked the NYTimes archive for stories citing Buffet's derivatives-as-WMD remark. Other than reporting Greenspan's quick pooh-pooh, there was essentially nothing between the remark itself (March 2003) and the beginning of the MBS/derivatives crash (Fall 2007).
So, where was the NYTimes? Why did no reporter/columnist/feature writer pick up on a dramatic warning by America's most prestigious financier/investor for 3.5 years and ask -- hey, what the heck does he mean?
#7 Posted by David Lewis, CJR on Mon 16 Mar 2009 at 11:19 AM
Maria, I had it in November of 1999. Here is an alternet reprint from the spring of 2000. The Hartford Advocate didn't (and doesn't) have much reach though. Sorry.
http://www.alternet.org/story/658/one_bank_under_god/
#8 Posted by edward ericson jr., CJR on Mon 16 Mar 2009 at 12:41 PM
As the one who directed the 1994 and 1996 GAO reports, I can give you an earful about what is going on now. Perhaps Columbia could invite Alan Greemspan and me up for a symposium where we could continue our debate.
#9 Posted by James Bothwell, CJR on Wed 18 Mar 2009 at 02:51 PM
Mr. Bothwell, I read this story and your comment and would really appreciate corresponding with you.
friedlandjt@yahoo.com
#10 Posted by Joel Friedland, CJR on Thu 26 Mar 2009 at 04:25 PM
Every now and then I sit down to focus my efforts on continuing to see and chart just how far down the rabbit hole goes. I've given up tennis. This is my new pastime.
I awoke this morning with refreshed vigor to be rewarded with knowledge of Brooksley Born, knowledge which was new to me. More digging led me to the work of James Bothwell.
I, too, often wonder about where are the people with firsthand knowledge who counter mainstream speak at the time events are in the making rather than years later.
I've been putting together a list of names of go-to people who have the insight and experience for getting right to the chase, obviating the need to recognize the existence of even the least-tainted mainstream voice. Born and Bothwell have been add to that list.
If there is a "red-pill" mailing list of any kind, please add me (esantoro AT waldenbags.com).
In these trying times, it is good to know that there are a hell of a lot of great Americans. These people are so busy doing the real work that it takes years to find out just who they are.
Thank you, James Bothwell, for the work you do.
#11 Posted by Ed Santoro, CJR on Sun 18 Oct 2009 at 03:01 PM
Ed,
For more from us on this, see our Audit Interview with James Bothwell from July.
#12 Posted by Ryan Chittum, CJR on Sun 18 Oct 2009 at 03:53 PM
Thanks, Ryan. Read it and filed it. Now I'm on to Russ Baker's "Family of Secrets." Nothing turns up in CJR search for "Russ Baker." We need to change that.
It's time for a new set of those Friendly Dictator Trading Cards, but this time it's not the usual suspects--no, sir!
-- Rock the Pequod
#13 Posted by Ed Santoro, CJR on Thu 29 Oct 2009 at 01:38 PM
When a 10% default in derivatives market is equal to the worlds GDP ...Houston we have a problem
#14 Posted by otcnuclear, CJR on Sun 6 Jun 2010 at 05:42 PM