Poor Us: The Great Depression 2.0

March 12, 2009

Super Fail: Press downplayed ’94 Derivative Risk Report

Filed under: Who knew? — Tags: , , — debacled @ 11:47 am

Nano Journalist by arzamasRemember the infamous intelligence assessment memo that read something like “Bin Ladin to Strike US Really, Really Soon” that the Bush administration totally blew off? Then after the 9/11 attacks they claimed they hadn’t followed up because the warning hadn’t specified an exact date.

Well, journalists can start dusting off their alibis now that The Columbia Journalism Review (CJR) has dug up all of the “It’s-no-big-deal” reporting  that  followed a 1994 report from the Government Accountability Office (GAO) titled–and I’m not making this up–“Financial Derivatives: Actions Needed to Protect Financial Systems.”  CJR’s Elinore Longobard builds a case to show how reporters seemingly sided with financial insiders’  against  increased regulation the GAO report advocated:

“The two-hundred page report, two years in the making, could have resulted in tough derivatives legislation, which is to say needed regulation. But it didn’t. The reasons why are complicated, and the press is certainly not the only culprit here, but it did play a key role. What happened is this: A triumvirate of the financial industry, misguided regulators and a passive press relegated the report to the dustbin almost as soon as it came out.

This despite the fact that the report was remarkably prescient in its strong warning about derivatives—almost a decade before Warren Buffet’s now-famous derivatives-as-WMD comment.

The report does not entirely condemn derivatives, but it is full of flashing danger lights. First it offers some context:

Derivatives activities are rapidly expanding and increasingly affected by the globalization of commerce and financial markets. Much OTC derivatives activity in the United States is concentrated among 15 major U.S. dealers that are extensively linked to one another, end-users, and the exchange-traded markets.And then the warning comes:

This combination of global involvement, concentration, and linkages means that the sudden failure or abrupt withdrawal from trading of any of these large dealers could cause liquidity problems in the markets and could also pose risks to the others, including federally insured banks and the financial system as a whole.But that’s not all:

Although the federal government would not necessarily intervene just to keep a major OTC derivatives dealer from failing, the federal government would be likely to intervene to keep the financial system functioning in cases of severe financial stress. While federal regulators have often been able to keep financial disruptions from becoming crises, in some cases intervention has and could result in industry loans or a financial bailout paid for by taxpayers.Bailout. Paid. For. By. Taxpayers. The GAO didn’t have a crystal ball. It just did its job, which was to look at the facts. And after two years analyzing the situation, the GAO had earned the right to offer warnings. But the resulting work was unfairly dismissed—to all of our detriments.

Speaking of dismissal, that phrase “financial bailout paid for by taxpayers” was later derided in the press as a scare tactic. We’ll get to that in a moment, but first let’s finish with the report, which went on to offer some pretty straightforward guidelines (read on).”

via Renegade Futurist

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