The Man Who Knew: The Life and Times of Alan Greenspan — Twenty-one: THE ZIPSWITCH CHAIRMAN

1. 1. By 1994, the face value of privately negotiated derivatives had soared to $11 trillion, up from under $1 trillion in 1987.
2. 2. Bankers Trust CEO Charles Sanford could not explain what a 'wedding band' swap was, revealing that even top executives did not understand their own derivatives products.
3. 3. Bankers Trust employees referred to the 'ROF-factor' (rip-off factor) in deals and celebrated exploiting clients with complex derivatives.
4. 4. Greenspan overruled the New York Fed's preference for a private rebuke and supported a public enforcement action against Bankers Trust.
5. 5. Greenspan argued before Congress that derivatives were a zero-sum game that merely redistributed risk, not magnified it, and that no new regulation was needed.
6. 6. Greenspan declined to use regulatory policy to clamp down on risky derivatives, preferring to leave regulation to others and maintain that markets self-correct.
7. 7. Greenspan cited Mexico's 1982 default as evidence that financiers learn from errors, but the 1994–95 Mexican crisis proved the opposite.
8. 8. Despite the moral hazard risk, Greenspan supported a massive bailout for Mexico, arguing it was temporarily illiquid and too geopolitically important to fail.
9. 9. Greenspan called Rush Limbaugh to lobby for the Mexico bailout, but Limbaugh refused to moderate his opposition, dooming congressional approval.
10. 10. The Mexico bailout cemented Greenspan's status as a 'maestro' and trusted ally of the Clinton administration, but critics warned it expanded moral hazard.
11. 11. Greenspan warned his FOMC colleagues that the Fed's credibility had become a danger, as markets expected the Fed to manage risks that might be unmanageable.