Greenspan: subprime "accident waiting to happen"

NF Reporter · 12-12-2007, 05:32 AM

Reuters - The U.S. subprime mortgage crisis was an "accident waiting to happen" as a period of unprecedented global growth seduced investors into underpricing risk, former Federal Reserve Chairman Alan Greenspan argued in an article published by The Wall Street Journal on Wednesday.

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waltky · 12-12-2007, 09:20 PM

Doesn't do much for public confidence...

Why the Fed bailout might not work
December 12 2007: The announced plan to make credit markets more liquid could end up having the opposite effect.

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The Federal Reserve's latest move to make credit markets more liquid could deepen problems in the banking system and actually cause the markets to be even more illiquid. Wednesday, the Fed, along with other central banks, announced a plan that is designed to enable banks to borrow money directly from the Fed at below-market rates. This will allow a wider range of banks to access Fed credit, and simultaneously allow them to submit a broader range of collateral to the Fed when taking out those loans.

Why do this now? The Fed explained in a release Wednesday: "This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress." In layman's terms this means that rates on loans between banks - measured by something called the London Interbank Offered Rate, or Libor - are too high for the Fed's tastes, so it is now prepared to itself lend to banks at much lower rates. Before this move, banks could borrow directly from the Fed through the so-called discount window, at 4.75 percent. The key Federal funds rate is lower, at 4.25%, but that is open to a narrower range of financial institutions and accepts a narrower range of collateral than the discount window. The new program - called the Term Auction Facility (TAF) - will auction funds to banks at rates very close to the lower Fed funds rate. The first TAF auction, for $20 billion, is scheduled to begin on Dec. 17.

What could go wrong with such an approach? Surely, it makes sense for banks to be lending to each other at lower rates, since that can spark more lending across the whole financial system. But Libor is a market rate, ultimately reflecting banks' views on each other's creditworthiness. Indeed, at 5.06% before news of the TAF was released by the Fed, Libor was considerably higher than the Fed funds rate, reflecting banks' caution about each other. But maybe the widened spread between Libor and the Fed funds rate is an inescapable product of the times. Given the credit problems U.S. banks are facing, they are naturally wary of each other. Maybe the Fed thinks banks are being overcautious, so the TAF is its way of bypassing what it sees as unwarranted skittishness. But it makes more sense to believe the banks' view of each other than the Fed's. Banks do business with banks each day, so they're far more likely to have a good handle on each other's balance sheet problems. Moreover, as theoretically profit-making entities, private banks have to carefully assess the creditworthiness of the borrowers, which means they have far more incentive to do their homework than the Federal Reserve.

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waltky · 09-15-2008, 01:27 AM

Greenspan predictin' recession...

US in 'once-in-a-century' financial crisis
September 15, 2008 - THE US is mired in a "once-in-a century" financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said today.

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The ex-central banker said the crisis was the worst he had seen in his career, still had a long way to go and would continue to affect home prices in the United States. "First of all, let's recognise that this is a once-in-a-half-century, probably once-in-a-century type of event," Dr Greenspan said on ABC's This Week program. Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Dr Greenspan replied: "Oh, by far."

"There's no question that this is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go," Dr Greenspan said. "And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilises. "That will induce a series of events around the globe which will stabilise the system." Dr Greenspan was also asked whether the United States had a greater-than 50 per cent chance of escaping a recession.

"No, I think it's less than 50 per cent. "I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring." The former Federal Reserve chairman also predicted the financial crisis would see the failure of more major financial institutions, even as embattled Wall Street investment giant Lehman Brothers scrambled to find a buyer. "In and of itself that does not need to be a problem. It depends on how it is handled and how the liquidations take place. And indeed we shouldn't try to protect every single institution."

More US in 'once-in-a-century' financial crisis | Business Breaking News | News.com.au

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U.S. banking and financial system in crisis
Sunday 14th September, 2008 - Giant U.S. and global banks were in crisis talks with the U.S. Treasury, the Federal Reserve and the Securities and Exchange Commission Sunday night.

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At issue is the looming failure of Lehman Brothers, a firm founded in 1850, weighed down by exposure to the subprime mortgage sector, and saddled with billions of dollars of real estate, and increasing scrutiny from credit agencies. Talks to save the bank appeared to be collapsing late Sunday with fears the bank could seek bankruptcy as early as Sunday night.

Meantime Bank of America, one of two major banks in discussions with Lehmans, the other being the British Bank Barclays, has withdrawn from the talks and is believed to be preparing an offer to take over rival Merrill Lynch. The U.S. banking system landscape is radically changing which could lead to Morgan Stanley and Goldman Sachs remaining the only independent investment banks.

"The U.S. financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey told the Reuters newsagency. "It's a new financial world on the verge of a complete reorganization."

U.S. banking and financial system in crisis

waltky · 10-23-2008, 12:39 PM

Huh? I dunno...

Greenspan: It's a 'credit tsunami'
October 23, 2008: Former Fed chairman says crisis will pass, and U.S. will end up with 'far sounder financial system.'

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Former Federal Reserve Chairman Alan Greenspan told a House committee Thursday that the nation will emerge from the current credit crisis with a "far sounder financial system." "We are in the midst of a once-in-a century credit tsunami," Greenspan told the House Oversight and Reform Committee.

Greenspan said that whatever regulatory changes are made to respond to the crisis, "they will pale in comparison to the change already evident in today's markets." Because of their hard-won experience, markets "will be far more restrained than would any currently contemplated new regulatory regime," he said. "Investors, chastened, will be exceptionally cautious," he added.

In opening statements, Rep. Henry Waxman, D-Calif., committee chairman, said the current economic crisis could have been prevented "if regulators had paid more attention and intervened with responsible legislation. The list of regulatory mistakes and misjudgments is long and the cost to taxpayers and the economy is staggering."

Waxman put Greenspan on the spot, asking if he made any mistakes during his tenure as Federal Reserve chairman that may have contributed to the mortgage crisis. Greenspan said he made a mistake in presuming that lenders themselves were more capable than regulators of protecting their finances. He said he was "shocked" when that system "broke down."

"I still do not understand exactly how it happened," said Greenspan.

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