When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

With regard to derivatives, the policy-making arm of the Fed took a laissez-faire approach—starting with Greenspan, who was enamored with the seamless artistry of the new financial tools. In public debates, Greenspan repeatedly joined forces with private bankers, led by Citicorp’s John Reed, who were fighting tooth and nail to head off proposals for tougher disclosure requirements. Even as hedge funds increasingly used swaps to dodge the Fed’s own margin rules, Greenspan cast an approving eye. Incredibly, rather than trying to extend some form of margin rule to the derivative world, Greenspan proposed to eliminate the margin rules entirely. His 1995 testimony to Congress read like a banker’s brief. At its heart was a beguilingly simple idea: that more trading (and hence more lending) was always and inherently good because it bolstered “liquidity.”