By Garver, Rob
Federal Reserve Board Chairman Alan Greenspan used his semiannual economic report to Congress on Wednesday to mount a strong defense of the value and safety of derivatives contracts, which have come under increased scrutiny in the wake of Enron Corp.'s collapse.
The explosive growth of the derivatives market in the past 15 years, Mr. Greenspan said, has "contributed to the development of a far more flexible and efficient financial system." He added that the failure of the energy trading firm was a result of "an old-fashioned excess of debt" -- not its use of derivatives.
"What I sense happened is that they ran into losses which they basically endeavored to obscure," he said. "There is nothing that they did which could not have been done in 20 different ways. It had nothing to do with derivatives, except that derivatives happened to be one of the vehicles that were involved."
His remarks came during testimony in which the Fed chairman argued for legislation that would encourage insurers to offer terrorism policies for commercial real estate and asserted that an improved economy would soon ease credit terms for small-business borrowers.
In his prepared testimony, Mr. Greenspan conceded that the ways firms account for their derivatives transactions are often so opaque that counterparties may be unable to judge risks accurately. One result of the Enron debacle, he said, could be market-driven improvements in the disclosure of accounting techniques.
"In that regard, the market's reaction to the revelations about Enron provides encouragement that the force of market discipline can be counted on over time to foster much greater transparency and increased clarity and completeness in the accounting treatment of derivatives."
Nevertheless, he said, "swaps and other derivatives, throughout their short history, including over the past 18 months, have been remarkably free of default."
Committee Chairman Michael G. Oxley, R-Ohio, asked Mr. Greenspan if, because of Enron, Congress should reassess legislation passed in 2000 to overhaul the Commodity Exchange Act. …