Critics of derivatives often raise the specter of the failure of one dealer imposing debilitating losses on its counterparties, including other dealers, yielding a chain of defaults. However, derivatives market participants seem keenly aware of the counterparty credit risks associated with derivatives and take various measures to mitigate those risks."
"The use of a growing array of derivatives and the related application of more-sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries."
"…the success [of derivatives] to date clearly could not have been achieved were it not for counterparties' substantial freedom from regulatory constraints on the terms of OTC contracts. This freedom allows derivatives counterparties to craft contracts that transfer risks in the most effective way to those most willing and financially capable of absorbing them." Alan Greenspan, 2003
So, Sir Alan just was not aware of the potential for a single counterparty to inflict systemic risk on the broader markets? How could he have known this. This is why he opposed the imposition of almost any regulatory oversight on the derivatives markets and hedge funds. He just didn't know, right?
Is this why he could argue with a straight face that a lack of margin requirements or minimum capital rules on derivatives positions would "promote the safety and soundness of broker-dealers, by permitting more financing alternatives and hence, more effective liquidity management."
Or one might ask, did he know of the danger, but just did not care for whatever reason?
"Had the failure of LTCM triggered seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own." Alan Greenspan in 1998 Fallen Star: Greenspan's Testimony Before Congress on the Fed's involvement with LTCM
As Charles R. Morris observes in his brilliantly entertaining and informative book "The Trillion Dollar Meltdown"
"In other words, counterparty surveillance works fine, so long as you're willing to accept the occasional crash of the economies of many nations. But given the enormous rewards that accrue to top-of-the-food-chain players... true market-believers may find that a cheap enough price."In other words if you are counting the profits as enormous personal riches to your own small elite class, and accruing the losses to Other People's Money (OPM), the public trust, and all holders of US dollars, its a reasonable arrangement to promote if you are a dishonorable pigman or a willing servant to same.
