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Thursday, October 23, 2008

Allan Greenspan's Shocked Disbelief and Denial of Responsibility

During his prepared testimony today before the House Oversight Committee, former Fed chairman Allan Greenspan said
"those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined."
It is hard to believe the Fed chairman was that clueless.

Did Greenspan not learn anything from Enron, WorldCon and the accounting firms that signed off on the books of such good clients?

Did Greenspan not learn anything all the internet IPOs of worthless companies with no profits where insiders kept selling shares all the way up and all the way down while leaving "clueless" 401K type shareholders and index funds who had to buy holding the bag?

Key Comments:
  • "In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. "
    Reminds me of tobacco companies putting labels on their death sticks saying "smoking can kill you."

  • "This crisis, however, has turned out to be much broader than anything I could have imagined."
    No kidding Al....

  • 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. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage backed securities being “subprime” were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with U.S. home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a “steal.
    Yes Al. The people we paid and TRUSTED you to REGULATE found a way to sneak their "worthless" or at least "harmful products" by YOU so they could generate high fees and vanish before the stuff hit the fan. Skip the fancy language Al and admit you screwed the pooch.
At least I like his conclusion:
"This crisis will pass, and America will reemerge with a far sounder financial system."
Full text of Greenspan's prepared remarks.

During the Q&A, Greenspan said he did not take out an adjustable mortgage because he thought it was too risky. I believe that is a lie or a misrepresentation of facts. I doubt he needed a mortgage with his high net worth AND I remember clearly him on TV recommending adjustable mortgages. Erin Burnett said the same thing on CNBC today.

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