Depending on which wise man you listen to, credit derivatives will either take the country to hell in a hand basket or aide a slipping economy with soothing balm. The former sentiment was voiced in March by uber-investor Warren Buffett in his annual letter to shareholders of Berkshire Hataway Inc. The latter was expressed Thursday by Federal Reserve Chairman Alan Greenspan.
Speaking via satellite to a banking conference gathered in Chicago, Greenspan rebuffed Buffet’s comments that derivatives were financial weapons of mass destruction.
According to Greenspan, derivatives do not pose a threat and manage to distribute risk. This, in turn, lessened the severity of the recession in 2001, he said.
“Even the largest corporate defaults in history [WorldCom and Enron], and the largest sovereign default in history, Argentina, have not significantly impaired the capital of any major financial intermediary," Greenspan told conference-goers, according to a report from the Associated Press. “The benefits of derivatives, in my judgment, have far exceeded their costs.”
A preliminary finding of recent Fitch Ratings survey estimated the overall size of the credit derative market to more than $2 trillion in size.
Greenspan acknowledged that, as in many other areas, some problems exist in the use of derivatives. However, he warned against increasing government regulation.
Certain forms of derivatives used by hedge funds and banks are unregulated. Greenspan stated he believed that credit derivative market participants themselves are well equipped to manage situations, as they are generally sophisticated investors. Government regulations, he explained, could end up giving a false sense of security to a highly complex market.