Capital Insights with Jack Kern
- Oct 24, 2008
"Why, its getting so a man can't earn a dishonest living no more!" Yosemite Sam, (c) Looney Tunes 1949
In a rare misstep in an otherwise brilliant career, former Fed Chairman Alan Greenspan, who probably thought he was still on his book tour for the newly released "Geez, I had no idea and if I did, I wasn't aware of it," appeared before a Congressional Committee and gave his version of the subprime events showdown. In what was performance art, reminiscent of Yosemite Sam and Bugs Bunny, Greenspan maintained his composure in front of the moron squad, headed by Henry Waxman, Representative, from California's liberal elite zipcodes in Beverly Hills and the surrounding areas loaded with nuts and flakes. (A tribute to California's rich agricultural heritage.) You'll remember Henry, who while serving as Chairman of the House Oversight and Government Reform Committee, held hearings recently on the popular shooting gallery targets Lehman Brothers and AIG, but refused to look into GSE darlings Fannie Mae and Freddie Mac.
Dr. Greenspan, who has been, in the past resoundingly criticized by me for his monetary policy and the dubious distinction of having caused two, count them – two bubbles, (tech and housing) was treated to a barrage of questions and rampant accusations by Henry and his sidekicks. (By the way, if you're a Fed Chairman and you cause two bubbles during the hundred years you were on base, shouldn't that get you into the Guinness Book of World Records?)
After the day ended, I realized something. Dr. Greenspan was essentially right in his testimony and is not at fault, but perhaps at error. Let me explain. I know a lot of Fed guys. They're just about the most dedicated bunch you've ever seen and contrary to the Dr. Frankenstein version of scientists or economists (you'd never catch an economist wearing white, especially after Labor Day), the Fed guys pay attention to trends. In the Beige Book, they report on trends in each Fed district after speaking with lots of local business leaders and regional economists. I have been a sometimes participant in this process and have helped to represent our industry in some venues with the Fed. These are really brilliant guys.
When Dr. Greenspan told the committee that in essence, "This crisis has turned out to be much broader than anything I could have imagined," and "The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer," he provided perhaps the best explanation so far for what really happened.
So, who, exactly is to blame for this resounding collapse in common sense and financial mis-engineering?
I'm putting this one at the steps of the Congress. Congress has pursued, to the exclusion of any rational purpose, a politically motivated, unbalanced housing policy. Congress has pushed, despite evidence to the contrary, homeownership at any cost. Congress has failed to keep in place legislation that kept banks as banks, insurance companies as insurance companies and opened up the floodgates of the capital markets to unregulated and poorly understood practices. Derivatives, no problem, credit default swaps, here you go, complicated, completely fraudulently packaged CMBS, how many do you want?
Feeling satisfied with the collosal clowns of the midway, the credit rating agencies convinced Congress it was ok for them to rate their client's paper, and it wasn't really a conflict that they were paid for that rating. These agencies, using models designed to support their scoring, promptly began an orgy of self interest, culminating, at their own admission in battles over market share for business, with little regard for the accuracy or integrity of the rated instruments.
In what I take to be a back handed slap at the Congress, Dr. Greenspan offered, "Had the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today."
It is wrong for Waxman and his coterie of idiots to call into question the honor and integrity of Dr. Greenspan and the others during the hearings. The Congress is the one that needs to look at itself, eliminate corrupting earmarks and rather than measuring progress in political careers by how much legislation is introduced, instead focus on a rational, balanced set of policies, including a balanced budget.
Quoting Yosemite Sam in 1960:
Advisor: But Sire, there is no more money…
Yosemite Sam: You know the penalty for not having the books balanced!
Advisor: Oh no. Not the 'nose in the book' penalty.
Advisor puts his nose in the book.
I think you know what happens next.