By Bill Murphy, Chairman Gold Anti-Trust Action Committee Inc. 11p CT Tuesday, November 19, 2002
The following remarks by Fed Chairman Alan Greenspan sound like "cover your butt" talk.
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Greenspan Says Central Banks Must Watch Derivatives
By Michael McKee
WASHINGTON, Nov. 19 (Bloomberg) -- Governments must be careful not to over- regulate financial derivatives and central banks should not give the impression they will always bail out institutions if those instruments fail, Federal Reserve Chairman Alan Greenspan said."
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The whole report on Greenspan's speech is appended here.
Something is up and this wimp knows it. This is exactly what the Gold Anti-Trust Action Committee, the GATA Army, and Doug Noland of www.PrudentBear.com have sounded the alarm about for years.
My guess is that the gold/interest rate derivative neutron bomb is slowly going off. Now that it is too late to do anything about it, Sir Blowhard is speaking out, after blocking any sort of regulation of derivatives while he supposedly was minding the store.
Remember that a GATA delegation consisting of Frank Veneroso, Reg Howe, Chris Powell, and myself met with with House Speaker Dennis Hastert at the U.S. Capitol on May 10, 2000, and warned him of a looming derivatives crisis. We gave him a copy of our Gold Derivative Banking Crisis report, which we also gave to U.S. Rep. Spencer Bachus, chairman of the House Subcommittee on Domestic and International Monetary Policy, which has supervision of gold and silver issues. Bachus brought seven staff members to that meeting.
GATA then met with the Dr. John Sylvia, the chief economist of the Senate Banking Committee.
The next day I delivered a copy of the Gold Derivative Banking Crisis report to the office of every House and Senate banking committee member.
The retiring chairman of the Senate Banking Committee, Phil Gramm of Texas, is a hack. He refused to acknowledge what GATA had to say. His wife, Wendy, a former chairman of the Commodities Futures Trading Commission, was on the Board of Directors of Enron. I could go on and on about our "behind-the-curve" Congress. When it comes to taking on the big-money crowd, they don't want to hear about it.
No one is more calculating than Sir Blowhard, down to his use of adjectives. This story is no fluke. We are close to the day when all heck breaks lose. Greenspan is close to his day of reckoning.
Buy gold and the gold shares.
Got to be in it to win it!
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Greenspan Says Central Banks Must Watch Derivatives
By Michael McKee
Washington, Nov. 19 (Bloomberg) -- Governments must be careful not to over- regulate financial derivatives and central banks should not give the impression they will always bail out institutions if those instruments fail, Federal Reserve Chairman Alan Greenspan said.
Derivatives, such as futures and options, are based on other assets and used to insure against price swings. They have become "central" to global growth because they make it easier to take risks, Greenspan told the Council on Foreign Relations.
At the same time, derivatives' reliance on leverage creates the "remote" possibility of a chain reaction of failure, "a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked," he said.
Fed officials feared that could happen following the September 1998 collapse of Long Term Capital Management, a hedge fund which lost $4 billion mainly from wrong bets on differences between bond and futures prices. While the Fed didn't use its lender of last resort power by putting money into the firm, the central bank helped organize a rescue by Wall Street banks and other creditors.
"Such a public subsidy should be reserved for only the rarest of occasions," Greenspan said. "If the owners or managers of private financial institutions were to anticipate being propped up frequently by government support, it would only encourage reckless and irresponsible practices."
Gauging Risk
The increased use of derivatives has helped lenders better gauge risk because the possibility of default is built into their price, Greenspan said.
In recent months, derivative interest rates have risen on concerns about corporate governance, he said. "The perceived risk of default of both financial and nonfinancial firms has risen markedly in the wake of company-threatening scandals, though levels remain moderate for both."
The Fed chairman's text, similar to remarks he delivered in London on Sept. 25, didn't discuss the U.S. economy or monetary policy. On Nov. 6, the central bank voted to lower the U.S. benchmark overnight bank lending rate to a 41-year low of 1.25 percent.
Instead, he expanded on arguments he's made in the past against over-regulation of the derivatives market. Derivatives are measured by notional amount, the value of underlying assets. Their use is growing as a slump in stocks prompts investors to seek returns elsewhere.
$128 Trillion
Derivatives trading outside exchanges grew 15 percent to a record $128 trillion in the first half of the year, driven by contracts pegged to interest rates, the Bank for International Settlements said earlier this month. The market is more than four times global gross domestic product as measured by the World Bank.
The development of derivatives such as securitized bank loans, credit card receivables, and secondary mortgage markets is helping build a "far more flexible, efficient, and resilient financial system than existed just a quarter-century ago," Greenspan said.
For that reason, governments must be careful to ensure they don't stifle risk-taking in regulating derivatives.
"We have the responsibility to prevent major financial market disruption through development and enforcement of prudent regulatory standards," Greenspan said. "But we also have the responsibility to ensure that the regulatory framework permits private-sector institutions to take prudent and appropriate risks, even though such risks will sometimes result in unanticipated bank losses or even bank failures," Greenspan said.
Terrorist Attacks
"While regulation must change as financial structures do, such regulatory change must be kept to minimum to avoid fostering uncertainty among innovators and investors," Greenspan said.
Over the past year, the U.S. was able to withstand the Sept. 11 terrorist attacks, the "draining impact of a loss of $8 trillion in stock market wealth" and a "sharp contraction" in capital investment largely because derivatives spread risk, particularly for major banks.
"Importantly, despite significant losses, no major financial institution was driven to default," he said.
Derivatives have also made possible the secondary mortgage market that has been "so critical" in supporting consumer spending by allowing Americans to refinance their homes, he said. And they kept the collapse of telecommunications companies at the end of the 1990s from cascading into a wider financial crisis, he said.
Because banks and other lenders could mitigate their credit risk, damage from defaults by Enron Corp., Global Crossing Ltd., Railtrack Group Plc, and Swissair Group was limited, Greenspan said.
"In particular, the still relatively small but rapidly growing market in credit derivatives has to date functioned well, with payouts proceeding smoothly for the most part," he said. "Obviously, this market is still too new to have been tested in a widespread down-cycle for credit. But so far, so good."
(20min delay)
