Wikinvest Wire

We saw credit risks

Friday, September 28, 2007

Just a couple Alan Greenspan tidbits with which to end the week. Apparently the former Fed chief is set to meet with new British Prime Minister Gordon Brown this weekend and the BBC filed this report after an interview.

At odds with previous statements during a
60 Minutes interview that the Fed hadn't had a clue what was going on in subprime mortgage markets up until late 2006 comes this account where they were all-knowing about subprime credit risks for hedge funds but they weren't concerned because only rich people might lose money.

The credit crunch has brought havoc to global markets, and hit the UK with the crisis around Northern Rock.

One of the key causes was the bundling together and selling of debt from sub-prime mortgages, which subsequently saw high levels of missed payments.

Institutions which were stung by this then became less keen to loan money elsewhere, resulting in a tightening of credit.

"We did know what was going on and the reason we didn't stop them was that to a large extent these types of questionably egregious actions are taken by people who have their own money invested," he said.

"Hedge funds, who are presumably the largest culprit of all of this, are organisations in the US in which wealthy investors invest.

"I must admit that I do not have considerable concern about their net worth going from 40 million to five million, which in many cases is what's happened."
So, he was aware of subprime credit risks for hedge funds, but not aware of how subprime lending might have exacerbated the housing bubble?

No, he's already stated that "it’s far better to have people periodically going to excess with its adverse consequences than to try to block it off in the beginning (August 7th).

Hmmm... confusing.

Also, in this debate with Naomi Klein at Democracy Now!, he is once again successful in shifting the "interest rates too low"question back to the "conundrum" problem - being powerless to affect mortgage lending in the U.S.:
AMY GOODMAN: The sub-prime crisis that we are seeing today, many saying that you seriously contributed to this, laid the foundation with keeping the interest rates low.

ALAN GREENSPAN: Well, the sub-prime crisis did occur as a result of lower interest rates. The lower interest rates, however, are, if one takes a look at the whole context of rising home prices throughout the world, is clearly a global issue. It is the result of fundamental changes that occurred as a consequence of the end of the Cold War, and that housing bubbles appear in more than two dozen countries around the world, which screams for an explanation that is global, not individual.
Didn't most of the toxic subprime mortgages use adjustable rate loans that are based on short-term interest rates that the Fed had complete control over?

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7 comments:

Anonymous said...

If I were the paranoid type, I would say Ol' Man Greenspan wants to destroy the system in order to usher in a Randian paradise (read: nightmare). Of course that is almost surely not the case, but it is frightening to realize that the hypothesis fits the facts.

-Vespucian

Anonymous said...

I think he just wants to be liked.

Aaron Krowne said...

More important than interest rates, the Fed controls the reserve/capitalization requirements of all banks and bank-like entities. It is extremely suggestive in what constitutes a valid rating, and what responsible retail lending practices are (that's a big reason exotic ARM lending didn't take off until the Fed explicitly encouraged them).

Currently the Fed is wielding the reserve requirement power in the form of suspending 23A 10% set-asides for banks that run conduits which are getting into trouble.

At absolute levels as low as they are today, interest rates are little more than a distraction (at best, they tell you where international arb. capital will tend to flow).

Anonymous said...

http://www.fool.com/investing/high-growth/2007/09/28/cognos-loses-some-currency.aspx

However, over the past six months, the Canadian dollar has surged 16% against the U.S. dollar. The upshot is that Cognos’ expenses have inflated, chopping about 1.6% from its operating margins. While the company has the goal of 20% operating margins, it looks like the figure will instead be about 18% to 19%. And for a company that will generate more than $1 billion in revenue for the year, this is certainly material.

Anonymous said...

An anonymous poster wrote:
"I think he just wants to be liked."

That fits the facts too!

-Vespucian

Anonymous said...

Rant alert!

This is now getting pretty reviling and disgusting. The Mess that Greenspan Made - a great blog name but more charitable than I would be. It implies he had real power. At best he was a dupe and not an outright crook. Nowadays, just peddling a very obvious and revolting campaign of CYA. It's really hard to watch. But they call him Sir!

Why does everyone go along with it? I used to think people generally possessed a very acute sense for impropriety, even where they can't understand why. Maybe the herd instinct or desire to conform is just more powerful. Sick, sick, sick, sick, sick, sick.

Anonymous said...

Hey, maybe Greenie will have a last minute change of heart and publish a different revisionist memoirs: Confessions of a Central Banker. I'll buy that for a dollar!

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