Frank Partnoy: Allow him to be Frank
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Frank Partnoy: Allow him to be Frank

"Alan Greenspan is positively giddy about the beneficial effects of credit derivatives," said Frank Partnoy at the Euromoney Global Borrowers Forum in London in June.

It's fair to say that he doesn't share the Federal Reserve chairman's view. In fact Partnoy – a former Morgan Stanley banker, now a law professor in California and the author of books such as F.I.A.S.C.O. and Infectious Greed, believes that the boom in credit derivatives is one of the parts of the financial markets' sky that might fall in.

Why? "Credit risks don't just disappear when banks offload them," he said at the forum. "They get transferred to people who have no contact with the source of that risk. We have this disconnect for the first time in history."

The consequence is "that non-bank counterparties now bear credit risk. Are these the best people to bear it or are they the people least able to understand it?"

Partnoy didn't stop there.

Rating agencies, he said, are the "morons of the market. They are so profitable but they do an abysmal job of assessing credit. Their only consistency is being late."

As for Greenspan? "With some people there's a gap between the respect they receive and the respect they deserve. There's only so many times you can plead ignorance when you make a mistake."

Who said conference speeches were dull? 

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