Listening to Chris Cox, the chairman of the Securities and Exchange Commission, giving evidence to Congress a few minutes ago, I was particularly struck by his assault on the lack of regulation of the over-the-counter derivatives market.
Mr Cox described the unregulated $58,000bn credit default swaps market as “ripe for fraud and manipulation”, saying that it was a forum for the shorting of corporate debt without the oversight imposed on cash markets.
It was, of course, Congress that chose in 2000 not to extend regulation to OTC derivatives markets, as I noted in my column on Saturday. One of the most influential proponents of not regulating OTC derivatives was Alan Greenspan, then chairman of the Federal Reserve.
Mr Greenspan told Congress in 2000 that regulation of the OTC derivatives market was not needed because:
“OTC transactions in financial derivatives are not susceptible to – that is, easily influenced by – manipulation.”
So then, the OTC derivatives market. Not susceptible to manipulation, or ripe for it? What a difference eight years, and a global financial crisis, make!
At the time, Mr Greenspan’s reputation and influence was at its height, and Congress went along with his assessment. I presume that it will now change its mind.
