Oversight Committee Asks Greenspan for Answers
Congress had a heavyweight line-up of testimony today as the House heard from Alan Greenspan and the Senate heard from Neel Kashkari, the bailout’s interim pay master (his official title is Interim Assistant Secretary for Financial Stability).
Greenspan’s prepared statement spoke of his feeling of ”shocked disbelief” regarding the country’s financial crisis. Interestingly enough, many people blame him for helping the economy get there.
Here are some interesting pieces from Mr. Greenspan’s testimony…and my opinion. Please be advised, Mr. Greenspan is intellectually gifted, but lacking in the brevity department.
Greenspan: What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. 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.”
Silver: Agree. But, even especially the most sophisticated investors in the world should have known that in financial markets, a “steal” never stays as such! Steals are exploited until equilibrium is restored.
Greenspan: The consequent surge in global demand for U.S. subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem….Uncritical acceptance of credit ratings by purchasers of these toxic assets has led to huge losses.
It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead 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, in my judgment.
Silver: Even the best models built by the award-winningest experts cannot account for the one factor which controls market activity…PEOPLE. Models track past behavior and people behave differently (and irrationally!) everyday.
I think today’s testimony will essentially point the finger at lenders for engaging in shady loan origination practices to create more mortgage backed securities (MBS) and bankers for their insatiable appetite for MBS, pushing lenders for more, regardless of the quality of the underlying mortgages. More parties may get a slap on the wrist (i.e. credit rating agencies), but I think these two will catch the brunt of the fiery rhetoric.
I am all for getting to the bottom of this, but some of these testimonies appear to be photo-ops for politicians trying to score points with their constituents. I am sure that they are concerned, but it seems like the panel plays the game of ”who can stump the witness” with the most scolding or difficult question.
Here’s a question: When is the $700 billion going to be spent?
Perhaps I should say “invested” instead of “spent,” because if this goes according to plan the government will get the $700 billion back and a ton of interest.
Even so, that one is definitely a stumper.
Tags: bailout, greenspan, house oversight committee, kashkari, senate banking committeeRelated Stories
POSTED IN: Corporate, Economy, Federal Reserve, Investment, Market, News
1 opinion for Oversight Committee Asks Greenspan for Answers
Kia
Oct 23, 2008 at 10:51 am
They all played a part in this mess. Hindsight is always 20/20, but greed is something else!
Have an opinion? Leave a comment: