In an article yesterday at TheStreet.com, I enumerated the many amorphisms in the testimony of former Fed chairman Alan Greenspan before the FCIC (Federal Crisis Inquiry Commission). He proceeded to name a number of 'perps' responsible for the crisis. Hence the article title "Greenspan Lists Credit Crisis 'Perps'."
Curiously, but I guess understandably, Greenspan denied any responsibility for the credit and housing bubbles. Everybody else you might imagine had a role, although he dismisses the importance of issuance of sub-prime mortgages relative to the securitization and rating of the those mortgages. But even there, his testimony had contradictions enumerated in TheStreet.com article.
By the way, a recent Seeking Alpha article highlighted the secutization problems with sub-prime mortgages, but I do not dismiss the fraud that occurred in origination. On that account I disagree with the former chairman. Fraud occurred and was an important contributor to the crisis. We can argue whether securitization demand encouraged origination fraud or if origination fraud enabled securitization abuses. I see that as a false dichotomy, akin to the chicken or egg enigma. There is not a choice to be made; both activities contributed and it matters little whether one activity led the other or vice versa.
One notable point relates to what might be considered Greenspan revisionism, as discussed in the following:
In spite of the former chairman's confession last year that he had been wrong in his philosophical assumption that self-interests within the market would prevent overleveraging to the point of collapse, he still retains some laissez-faire sympathies. Today he said that if you cannot depend on the counterparty surveillance of the individual institutions then regulation cannot do any better. He took the position that all that was needed was a requirement for sufficient reserves and liquidity.
Greenspan predicted that there will be another crisis. This quote, from an article by James Politi and Alan Rappeport at ft.com, summarizes his view:
"The next pending crisis will no doubt exhibit a plethora of new assets which have unintended toxic characteristics, which no one has heard of before, and which no one can forecast today,” Mr Greenspan said. “But if capital and collateral are adequate, and enforcement against misrepresentation is enhanced, losses will be restricted to equity shareholders . . . Taxpayers will not be at risk."
Greenspan admitted that mistakes were made by the Fed during his tenure. He offered an estimate that he was right 70% of the time and wrong 30%. He suggested that 70% right was pretty good. Isn't a grade of 70% C-? I guess that C- can be considered pretty good if you are competing with geniuses. But, if I remember correctly, wasn't Greenspan supposed to be the genius? Wasn't that the reason, when he said something that no one understood, it was considered acceptable? After all, how could we, mere mortals, be concerned when the pronouncements by a financial deity were not completely clear?
The clay feet of this former idol were evident on several occasions.
When pressed by commission chairman Peter Angelides, former California State Treasurer, Greenspan admitted that some of the regulation might have been in the 30% category. But the admission was given grudgingly.
In an exchange with Brooksley Born, Greenspan mistakenly stated that AIG had been involved in writing insurance when asked about the role of CDSs issued by that company. These were clearly financial contracts. Mistaking CDSs for insurance is similar to the misrepresentation of hedging (for example, with options) as insurance.
Mr. Greenspan looked quite old in his appearance before the commission. Glimmers of the chairman of old appeared from time to time but he looked worn. And the old atmosphere of an audience with a high priest was definitely not present.
The testimony yesterday morning covered only about two hours and included a power failure and an interruption of the C-Span transmission. But, for this listener, it was more than long enough.
Here is a link to the C-Span video (Part 1) and here is Part 2.
Disclosure: No stocks mentioned.