Wednesday, October 30, 2013

"Gillian Tett has a talk with Alan Greenspan"

From the Columbia Journalism Review's The Audit blog:

The ‘Maestro’ admits he didn’t understand derivatives he touted; calls for bank breakup
The Financial Times’s Gillian Tett sits down with Alan Greenspan for a two-hour interview and gets some eye-opening admissions from the fallen “Maestro”:
What also worries Greenspan is that this swelling size has gone hand in hand with rising complexity - and opacity. He now admits that even (or especially) when he was Fed chairman, he struggled to track the development of complex instruments during the credit bubble. “I am not a neophyte - I have been trading derivatives and things and I am a fairly good mathematician,” he observes. “But when I was sitting there at the Fed, I would say, ‘Does anyone know what is going on?’ And the answer was, ‘Only in part’. I would ask someone about synthetic derivatives, say, and I would get detailed analysis. But I couldn’t tell what was really happening.”
This is simply outrageous. As Tett notes, Greenspan, who we now know didn’t understand them at all, touted the risk-dispersing benefits of derivatives as Fed chairman and fought those who would regulate them.
Here’s Greenspan in 2002 in a speech in London:
Financial derivatives, more generally, have grown at a phenomenal pace over the past fifteen years. Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. Moreover, the counterparty credit risk associated with the use of derivative instruments has been mitigated by legally enforceable netting and through the growing use of collateral agreements. These increasingly complex financial instruments have been especial contributors, particularly over the past couple of stressful years, to the development of a far more flexible, efficient, and resilient financial system than existed just a quarter-century ago.
Perhaps we should have known that in oracle-speak, “increasingly complex” meant “I can’t understand them.”

The same day, he attacked regulation of derivatives, saying “regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets” because it would undercut their “quasi-monopoly rents.”...MORE
Roger that, over.
See also:
Remarks by Chairman Alan Greenspan
Understanding household debt obligations
At the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C.
February 23, 2004

Greenspan says ARMs might be better deal