WASHINGTON -- Congress shouldn't use last month's bankruptcy by California's Orange County and other recent investor losses as an excuse to pass unneeded new laws on derivative securities, Federal Reserve Chairman Alan Greenspan and several regulators said yesterday.
"It would be a serious mistake to respond to these developments by singling out derivative instruments for special regulatory treatment," Mr. Greenspan said. For one thing, he said, their use isn't endangering the safety and soundness of the nation's banking system.
But Senate Banking Committee Chairman Alfonse D'Amato, a New York Republican, didn't rule out legislation, saying he is concerned about losses to taxpayers resulting from derivative investments. Such securities played a part in the $2 billion loss and bankruptcy filing by the Southern California county.
The hearing came a day after Mr. D'Amato's House counterpart, Banking Committee Chairman Jim Leach, R-Iowa, introduced a bill that would require increased federal supervision of derivative investment products.
Besides the Orange County losses, many banks, securities firms, mutual funds, pension funds, local governments and schools posted losses last year from their investments in newer types of derivatives securities. Higher interest rates were a key factor for the losses, which were a part of "many hundreds of billions of dollars" of losses to bondholders last year, Mr. Greenspan said.
His comments were echoed by Securities and Exchange Commission Chairman Arthur Levitt and Commodity Futures Trading Commission Chairman Mary Schapiro. "It would be a grave error to demonize derivatives and blame them for the [Orange County] loss," Mr. Levitt said.
Derivatives, which are contracts whose values are based on underlying assets or indexes, aren't inherently bad or good, the SEC chairman said. "They are a bit like electricity: dangerous if mishandled but bearing the potential to do tremendous good," he said.
The losses sustained by the Orange County Investment Fund "stem primarily from transactions in government securities and governmental agency obligations," Ms. Schapiro said.