Bernd Debusmann is a Reuters columnist. The opinions
expressed are his own.
By Bernd Debusmann
WASHINGTON At the height of Alan Greenspan's
fame, a Washington magazine portrayed him on its cover as a
Buddha figure, clad in a purple robe, sitting in the Lotus
position before adoring worshippers. "The Cult of Greenspan,"
said the headline. Inside, the story provided riveting detail
of the cult.
For example: A software program called "the Talmud of the
Federal Reserve" which translates every Greenspan sentence into
a predicted market reaction. A room at a Wall Street firm
turned into a Greenspan shrine, featuring quotations from 30 of
his speeches under a sign that reads "Greenspan's Teachings."
On a trader's desk, a small rock carved into a Greenspan
profile. A roped-off red leather chair where he once sat.
The March 30, 1998, issue of the magazine, The New
Republic, has become a collector's item. The names of Wall
Street houses in the article were invented, the cult
fictitious, the author disgraced, the story purged from
databases. But it sounded so plausible at a time of exuberant
Greenspan adoration, the article was not questioned for many
A decade later, the U.S. economy is ailing and has begun to
infect the rest of the world. In the hunt for a scapegoat -
standard operating procedure in Washington - many fingers point
at Greenspan and critics say his 18-year leadership of the U.S.
Federal Reserve led to today's troubles in the housing markets.
Instead of the fawning praise heaped on Greenspan when the
economy was booming, there are now websites portraying him in
dark colors. One site is called The Mess That Greenspan Made,
another Greenspan's Body Count. Greenspan's memoirs, The Age of
Turbulence, prompted hedge fund manager William Fleckenstein to
write a book entitled Greenspan's Bubbles, the Age of Ignorance
at the Federal Reserve. It's in its fourth printing.
America's present problems go deeper than the housing
market and Greenspan, who denies responsibility, is not alone
in having helped create what critics call the shadow financial
system. It runs on private, out-of-sight transactions involving
complex financial instruments that account for more money than
the combined value of stocks and bonds traded on transparent
A major milestone on the road to "what is fast becoming the
worst financial calamity since the Great Depression," in the
words of Morgan Stanley's Stephen Roach, was the Commodity
Futures Modernization Act (CFMA) of 2000. The way it was
written, introduced and passed speaks volumes about the
Washington intersection between politics, finance, and
LEGISLATION BY STEALTH
The 262-page piece of legislation was added as a
last-minute rider to an 11,000-page omnibus bill on the
afternoon of December 15, the Friday before the Christmas
recess. "I would say there was no one, except the drafters of
the bill, who understood what it did," said Michael
Greenberger, who served in the Commodities and Futures Trading
Commission in the late 1990s. "And the drafters were Wall
Street lawyers, not legislators."
What the bill did was to largely deregulate many complex
derivatives - financial instruments traded privately over the
counter or on futures exchanges - that gain or lose values as
an underlying rate, price, or other variable changes. Using
derivatives, traders bet on future trends in financial assets -
stocks, currencies, commodities, energy, mortgages - without
Signed into law by Bill Clinton a week after its stealthy
introduction, "the bill freed the (derivatives) system from any
regulation and set the stage for financial fiascos," said
Greenberger, now a professor at the University of Maryland.
"The trouble now is not just with mortgages, it's with all
kinds of loans," he said in an interview. "Derivative products
have been spread all over the world."
The man who introduced the bill, Phil Gramm, then a
Republican Senator from Texas, had close links with Enron,
where his wife Wendy served on the board of directors. Enron,
which went bankrupt in 2001, had lobbied vigorously for the new
legislation which exempted most trading on electronic energy
markets from regulatory oversight.
It is no longer fashionable for Wall Street movers and
shakers to publicly sing the praise of greed, as did the
arbitrageur Ivan Boesky in 1987, not long before he was tried
and imprisoned for insider trading. (The villainous Gordon
Gekko of the film Wall Street was patterned on Boesky). But
judging from the zest with which players plunged into dubious
derivatives, greed is alive and well and often trumps common
It's not as if there had been no warnings. "In our
view...derivatives are financial weapons of mass destruction,
carrying dangers that while now latent are potentially lethal,"
Warren Buffett wrote as early as in 2002 in the annual letter
to shareholders in his Berkshire Hathaway group. "We view them
as time bombs, both for the parties that deal in them and the
As Buffett, the world's richest man in 2008, explained it,
the range of derivatives contracts is limited only "by the
imagination of men, or madmen."
"The derivatives genie is now well out of the bottle, and
these instruments will almost certainly multiply in variety and
number until some event makes their toxicity clear."
Greenspan disagreed. In 2003, he wrote that he believed
derivatives had spread risks and thus softened the recession of
2001 which followed the bursting of the dotcom bubble.
Greenspan's mantra has been that regulation puts a brake on
markets and markets left alone know best.
Will Wall Street and the government draw lasting lessons
from the present mess? Don't bet on it.
(You can contact the author at Debusmann@Reuters.com)
(Editing by Sean Maguire)