Property Grunt

Friday, December 21, 2007

Greenspan Shrugged

This week the New York Times published an excellent article on Washington’s role or lack thereof in the subprime crisis. We all have seen that movie but what I find interesting is Greenspan’s role and his reaction to it.

December 18, 2007
Fed Shrugged as Subprime Crisis Spread
WASHINGTON — Until the boom in subprime mortgages turned into a national nightmare this summer, the few people who tried to warn federal banking officials might as well have been talking to themselves.
Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.
But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.
In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

Of course the subprime had no desire to adopt these practices. They had free reign to do what they wanted. They also realized that sooner or later the party was going to end so they had to bang out as many deals as possible. Anything interfering with those deals was unacceptable.

Want to here something funny? I don’t blame Greenspan for the subprime crisis. In fact if I were in his position I would probably take the same actions.

After the dot com meltdown, Greenspan needed to get the economy rolling again and housing became that engine to power it up and get us out of the recession. So he had to be very careful with whatever actions he took did not stifle that resurgence.

Let’s not forget his new boss who was pushing home ownership; he wanted every American to have the chance to own a home. It was his version of a chicken in every pot and a car in every garage. Owning a home is great for the economy because it creates tax revenue for local governments and local business like contractors, landscapers benefit from the new demand for their services. Our commander in Chief is also a Republican. The mantra of that party is less government. Any pleas for more government assistance would have fallen on deaf ears.

Always outnumbered, Always outgunned.

The agencies, however, were like a Rube Goldberg machine with parts moving in different directions. The Office of the Comptroller of the Currency was in charge of nationally chartered banks and their subsidiaries. The Federal Reserve covered affiliates of nationally chartered banks. The Office of Thrift Supervision oversaw savings institutions. The Federal Deposit Insurance Corporation insured deposits of both state-chartered and nationally chartered banks.

Greenspan wasn’t trying to avoid responsibility when he said that the resources and manpower were not available to regulate the subprime lenders, he really meant it.

As for the CYA
Mr. Greenspan was against the idea. In an interview last week, he said he feared that Fed examiners would fail to spot deceptive practices and inadvertently give dubious lenders what amounted to a government seal of approval.
“I remember telling him, ‘be careful,’ ” Mr. Greenspan said. If the Fed gave the appearance that it was overseeing thousands of local institutions, which he said it did not have the resources to do, “we’re going to end up with a situation that very well could be worse rather than better.”

Is Greenspan right? Would it have made it worse? I don’t know. What I do know is Greenspan is not an idiot. During his tenure he has seen the ups and downs of the national and global economy. So he he has probably developed a very keen sense of timing of when to act and when to sit back and let things play out. Another reason why Greenspan has been so successful is that he knows his limitations; remember he went into finance when he realized that he did not have the talent to become a professional clarinet player. He is also a man who picks his battles very carefully. And from what the article has described, Greenspan did not have the resources nor did he have the backing of the Commander in Chief to go out and clean house. And if he had gone forward and attempted to take control of the situation, a brand new clusterf**k could have been created that even he could not deal with. What if Greenspan inadvertently ended up putting a halt to all those foreign buyers gobbling up those bundled up mortgages or stifled the growth of the economy?

Also Greenspan had to look out for his own welfare. He was at the end of his tenure and there was no way in hell he would do anything to jeopardize any lucrative financial opportunities that were out there. He can't rely on Andrea Mitchell to pay the bills.

That is why I can’t really fault him for the subprime crisis because there were a ton of variables involved and a lot of them were out of his control.

In other words Greenspan was dealing with his own Kobayashi Maru. A pure no win situation.