"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," said Greenspan.....
http://www.reuters.com/article/newsOne/idUSTRE49M58W20081023
For one of the so called best central bankers ever, one has to wonder how naive he was to think that greed would not rule the day. There is a reason to have a system of checks and balances and assure that some are not overstepping prudence and jeopardizing the welfare of all.
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http://ap.google.com/article/ALeqM5jSSJzC1UNusL4eW21xsZ7HJcM8WQD9409R0O4
So he never suggested regulatory guidelines to protect against the possibility he might be wrong. This will go down as one of his big boo boos. I will nominate Greenspan as one that should be hanged in effigy. Maybe we should tar and feather him - better yet let's tar him and paper him with the 401K statements of Americans.
You don't have to look any further than how American corporations compensate their executives (mostly short term driven with no way to recover the compensation if the short term decisions have adverse long term consequences).
Here is a scary Halloween costume - dress up as America's 3rd quarter 401K statement with a net loss of $2.7 trillion in red ink at the bottom. The kids won't get it but it will sure scare most adults especially those close to retirement.
Greenspan relied on the business sense of these banks to do their homework on the securities they were buying. Investor common sense says do your research before you invest. That's what most small investors do.
I am sure Greenspan is puzzled on why these professionals did not heed the advice they give small investors. It seems to me that common sense says bundled subprime mortgages are a bad risk for investment.
Tar and feather him? That's just a little over the top. He misjudged the common sense of the American investment banker. I'm sure he's as confused as you are as to why these idiots invested so much in subprime loans.
Our only hope of salvation in this crisis is first time home buyers buying existing homes at dirt cheap prices. Now, they'll have to be credit worthy and social engineering experiment of selling homes to those who cannot afford them will end.
It was the Halloween spooks that took control for a moment. Actually, my tongue was planted firmly in my cheek when I made the tar remark. But I did like the tar and 401K part.
Brian, you have to admit that greed is a human characteristic that will always become part of the equation. Not recognizing this and how it can impact such prudence is a bit naive. Perhaps he misjudged the greed of the American investment banker. Certainly that is just a mistake and someday we will again deregulate these markets to free us of the regulations that are put in place over the next several months and perhaps years.
I don't think greed equals stupidity. I know that lending money to those who are not qualified to borrow it is a poor risk. Certainly these professionals should have.
I guess I would qualify as greedy. I want to make lots of money and have the government let me do it without "spreading it around". However, I like to think I'm not stupid.
Not all greedy are stupid. But frankly greed frequently stumps brains - just look at all those people that took those risks from making mortgages that they knew people could not afford to believing the price would go up and you could refinance later and take the equity you now have out or at least get a lower interest rate when that balloon payment comes due.
There always needs to be a system of checks and balances or those with "greedy" motives will move in. Frankly this bubble had a lot of parties involved. What else but greed explains it? Can you explain it any other way?
I've been investing for 40 years now including portfolio management and watching this from the beginning. When I saw all those no down payment and interest only house signs, I knew the day was inevitable. Without any knowledge of the derivatives markets, one could still see if coming. If you understood derivatives, which few did and still do, you understood just how the house of cards was being stacked - higher and higher.
...or are they just looking for the next fool who will pay more for their stock? Does the $400 that people pay for Google stock reflect an underlying dividend, or is there just faith the company will continue to "grow"? I'm no expert, if I were I am sure that I would have gotten together with my pals, run up my stock, and dumped it at an advantageous time. Nothing beats insider information.
"banks would be more prudent in their lending practices because of the need to protect their stockholders"
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
-128, title VIII, 91 Stat. 1147, 12 U.S.C. ยง 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] The Act was intended to reduce discriminatory credit practices against such neighborhoods, a practice known as 'redlining'.[4] The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. (See full text of Act and current regulations.[5]) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions.[6]
And in case you are too lazy to look up "REDLINING"
http://en.wikipedia.org/wiki/Redlining
"The most devastating form of redlining and the most common use of the term refers to mortgage discrimination in which middle income black and Hispanic residents are denied loans available to lower income whites. The term "redlining" was coined in the late 1960s by community activists in Chicago. It describes the practice of marking a red line on a map to delineate the area where banks would not invest;"
In other words, banks were forced to offer loans in areas that they would normally NOT invest in or face being sued.
In fact, Citibank was sued and forced to make loans in areas that it otherwise would not have done so.
And guess who sued CitiBank?
http://www.mediacircus.com/2008/10/obama-sued-citibank-under-cra-to-forc...
http://www.nypost.com/seven/09292008/postopinion/opedcolumnists/os_dange...
"A decade ago, one federal official fought for more oversight of derivatives markets, but top Wall Street figures pooh-poohed her.
WASHINGTON - A decade ago, long before the financial calamity now sweeping the world, the federal government's economic brain trust heard a clarion warning and declared in unison: You're wrong.
The meeting of the President's Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Securities and Exchange Commission Chairman Arthur Levitt - all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.
Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn't like to be pushed around.
Now, in the Treasury Department's stately, wood-paneled conference room, she was being pushed hard.
Greenspan, Rubin and Levitt had reacted with alarm at Born's persistent interest in a fast-growing corner of the financial markets known as derivatives, so called because they derive their value from something else, such as bonds or currency rates. Setting the jargon aside, derivatives are both a cushion and a gamble - deals that investment companies and banks arrange to manage the risk of their holdings, while trying to turn a profit at the same time."
http://www.idahostatesman.com/102/story/539507.html
I remember the derivatives warnings in 1996 when I was working for Sen. DeWine.
Allen County (Lima) was one of the counties are office in Toledo worked with. The City of Lima was heavily invested in derivatives and it was a cause for concern for the State of Ohio.
Jim Petro made a long dissertation on the riskiness of derivative investments by municipalities to the Lima News.