“Who Created This Monster?” was the title of a mammoth New York Times piece yesterday about the nation’s unfolding economic crisis. The answer to the question–mostly financial speculators as well as Congress and both Democratic and Republican presidential administrations that failed to regulate them–can be found in the Times story but it’s buried beneath piles of self-serving flimflam from some of the key players.
“Some people want to blame our industry,” Robert G. Pickel, chief executive of the International Swaps and Derivatives Association (ISDA), a trade group, told the Times. “We believe that there are good investment decisions and bad investment decisions. We don’t decry motor vehicles because some have been involved in accidents.”
It’s true that cars don’t kill people–bad drivers do. Let’s pursue the analogy. Pickel’s group has long and bitterly opposed any sort of government regulation of what the Times calls “the private trading of complex instruments.” In other words, the government should loosen the rules so that anyone can drive a car, even untrained teenage alcoholics and the legally blind. And then, in Pickel’s world, let’s pretend that the ensuing surge in traffic fatalities is in no way connected to the rule changes.
You can chart the ISDA’s opposition to regulation on the group’s website and through Pickel’s public pronouncements during recent years. For example, there were plenty of people who called for new regulations on derivatives in the aftermath of Enron’s collapse. Not the ISDA. It published a report in April 2002, “Enron: Corporate Failure, Market Success,” which dismissed any need for regulation in the aftermath of the company’s collapse. It said:
Billions of dollars of market value erased. Thousands of jobs lost. Savings wiped
out. A demise as spectacular as Enron’s has failure written all over it. And in some
quarters, that failure is at least partially attributed to the complex derivatives transactions that Enron entered into–transactions that some believe may have been used to conceal or obscure the company’s true financial condition, to hide losses, and to bolster earnings. Yet a close analysis of the Enron situation yields a different story, one that is unfortunately not likely to sell many newspapers or provide much fodder on the floors of Congress. Put simply, the market worked.”
The following year, Pickel’s group lobbied successfully against a Senate amendment “that would have subjected energy derivatives to regulation by the Commodity Futures Trading Commission,” according to HedgeWorld Daily News. “This was the third [failed] effort by a group of senators, notably Dianne Feinstein (D-Calif.), Carl Levin (D-Mich.) and Richard Lugar (R-Ind.), to close what they regard as a gap in the energy regulatory system, the so-called Enron loophole,” said the trade publication. The Senate voted against the amendment by 56 to 41 and Pickel immediately issued a statement expressing “his satisfaction that with each of the three votes the margin against this proposal has increased.”
Fast forward to early 2007 (and there’s plenty of “crash footage” in the intervening years). “The Bush administration and senior regulators said today that there was no need for new regulations that would make the rapidly growing hedge fund industry more transparent or subject to greater oversight, or to protect the financial system from the collapse of a large fund company,” said a February 23 story in the New York Times. “To that end, the administration and the regulators proposed that investors, hedge fund companies and their lenders adopt nonbinding guidelines that they said could make the hedge fund companies more transparent and their investors and creditors more vigilant to shady operators and excessive risk-takers.”
The Times said the decision “reflected both the strong antiregulatory philosophy of the administration and the formidable new clout and influence of the wealthy hedge fund industry. Three of the major economic policy makers in Washington–Treasury Secretary Henry M. Paulson, Robert K. Steel, who is the under secretary of the Treasury, and Joshua Bolton, the White House chief of staff–are all alumni of Goldman Sachs, which in the last decade has evolved into perhaps the most significant player in the private equities market.” And there was Pickel, hailing the decision, saying it “highlights the central role that market discipline plays in addressing the question of systemic risk and encourages regulators, investors, counterparties and investment pools alike to be proactive in assuring the healthy functioning of the markets.”
Yesterday’s story in the Times said that a “milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act [CFMA]. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.”
On July 12, 2007, Pickel appeared before a Congressional Subcommittee to argue against any changes to the Act. “Almost immediately after Congress passed the CFMA there have been calls in some quarters to repeal parts of that law,” he said. “Fortunately Congress has time and again rejected [such] efforts.”
So derivatives traders, helped along by willing politicians, have for years fought off demands for regulation. And now Pickel is baffled as to why anyone would possibly blame his ilk for having a hand in the economic unraveling currently taking place.