Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (56 page)

When the FOMC decides to lower rates (synonymous with “easing” or “loosening” money), the Federal Reserve transfers additional money into the Fed funds market. (The banks sell Treasury bills to the Fed and receive dollars. The banks then have more money to lend.) If the current rate is 5.0 percent, and the FOMC decides to cut the rate to 4.5 percent, the Fed adds money into the market until it rebalances supply and demand at 4.5 percent. This is not a stationary rate. When the “Fed funds rate is 4.5 percent,” the banks trade funds at approximately that rate. The Federal Reserve continually adds or subtracts funds to hold the rate at around 4.5 percent.

When the FOMC decides to raise rates (synonymous with tightening money), the Federal Reserve sells Treasury bills to the banks and receives dollars in return. The banks then have less money to lend. If the current rate was 4.5 percent, and the FOMC decided to raise the rate to 5.0 percent, the Fed will keep selling Treasury bills into the market until it rebalances supply and demand at 5.0 percent.

When the Fed discusses whether it will or will not “move,” this refers to whether or not it will change the fed funds rate, either up or down.

I am thankful to Jim Grant, John Lukacs, and Maggie Mahar for their advice and for reading the early drafts.

I thank my father and John Lukacs for their encouragement when nobody wanted to publish a book about Alan Greenspan. I know this, since my attempts to raise interest in the publishing world were met with glazed eyes and “there are enough books about him already.” The observation is correct, but all the others were written before Greenspan’s fall.

McGraw-Hill was the only publisher with the foresight to anticipate Greenspan’s demise. Its farsightedness led to
Greenspan’s Bubbles
, published in 2008. Jim Grant suggested that McGraw-Hill contact me, since I had already done much of the research. Bill Fleckenstein wrote
Greenspan’s Bubbles
while I fed him the evidence. Leah Spiro, my editor at McGraw-Hill for
Panderer to Power
, was even more farsighted. She thought there was a lot more to the Alan Greenspan story than could be discussed in
Greenspan’s Bubbles
.

A number of people have offered advice. Most important were conversations with Bill Fleckenstein. Since
Greenspan’s Bubbles
was a short book, the discussion needed to be compressed. For instance, my excavations sometimes unearthed compelling evidence of Greenspan’s misjudgments but these misjudgments were, at the same time, difficult to interpret. Our protagonist made statements that compromised his previous arguments. I’d ask Bill, “Why did he say that?” During one such discussion, Bill memorably replied: “I don’t know what’s running through his head. Our job is to record that he said it.”

And so, if the reader of
Panderer to Power
wonders,“Why did Greenspan say that?” and finds little explanation from me, it is because I am no more a mind reader now than I was during the writing of
Greenspan’s Bubbles
. Filling pages with possibilities and probabilities is of limited value.
What
Greenspan (and anyone else discussed) did and said is generally accessible;
why
he (and others) made these decisions is fodder for discussion.

Editors, fact checkers, and proofreaders who gave me valuable help include Leah Spiro, Ruth Mills, Anne Greenberg, Ron Martirano Scott Pilutik, Cynthia Newberry, my father, and my daughter, Anna.

Bill Fleckenstein read several chapters in this book, for which I am most grateful. Others who read chapters, often on topics that they had personally observed or added valuable insights, include Caroline Baum, Frank Castle, Seth Daniels, Marc Faber, Earl Kishida, Bob Landis, John Lukacs, Hans Merkelbach, Jeff Poppenhagen, Dana Robinson, and Don Stanton. I thank them. They offered opinions; however, I wrote the book. All the mistakes and flaws are mine.

Most of all, I am thankful to my wife, Margaret, my daughter, Anna, and my son, Frederick.

A
ABX.HE 07–01, 332
ACC (American Continental

Corporation), 88
ACC Wholesale (ACC Capital
Holdings), 328
ACE Securities, Series 2005-HE5
CDO, 314
Ackerman, Joseph, 345
Adelphi Communications, 250 Adjustable-rate mortgages, 107,
292–293, 328–329, 344
Advisory Commission to Study the
Consumer Price Index
(
see
Boskin Commission) Aetna Life & Casualty, 112
AFL-CIO, 43
Agnelli, Giovanni, 75
AIG (American International
Group), 306, 347
n
.48,
The Age of Turbulence
(Alan
Greenspan), 303, 337–341 Air Products and Chemicals, 130 Albright, Madeline, 323
Allen, Richard V., 70
Amazon.com, 198
American Continental Corporation
(ACC), 88
American Express, 212, 306
American Financial Corporation,
80, 87, 88
American-made products, 51 Ameriquest Mortgage,
165, 328
Ameritrade, 212
Anderson, Martin, 3, 6, 15, 32, 68,
69, 83
Angell, Wayne, 122, 131–132 Appraisal fraud, 280
Arthur Andersen, 246
Artus, Patrick, 342
Asian markets, in late 1990s, 169,
171, 172
Askin Capital Management, 130 Asset bubbles, 289, 302–303 Asset deflation, 359
Asset inflation, 321, 343, 359 Asset-backed derivatives, 164 Associates First Capital
Corporation, 274
Astor, Brooke, 75
AT&T, 233
Aurora Loan Services, 274
Automobile industry, 51, 62,
246–247

B

Back from the Brink
(Steven K.

Beckner), 116
Bagehot, Walter, 103
Baker, James, 110, 323
Baker, Molly, 141
Bangalore, Asha, 307
Bank of America, 347
n
.48
Bank of United States, 352–353 Bank reserve requirements, 367

changes by Federal Reserve in 1950s–1960s, 21
n
.9
changes by Federal Reserve in 1990s, 104, 124, 134–135,135
n
.7 Bankers Trust, 184
Banking:
1980s real estate lending, 105, 114–115
and 1987 stock market crash, 112 in 1994, 128
2007 crisis in, 334
2009 bailouts for, 132
deregulation of, 99–100, 102 and Federal Reserve System, 367–368
financial concentration in,
100–101
hedge funds opened by, 321 and home loans (
see
Mortgages) international banking
crises, 311
large bank mergers, 277
leveraged bank balance
sheets, 331
leveraged buyout, lending by, 318–319
and liquidity of banks, 36
and recession of early 1990s, 122, 124
regulation of, 182–183, 185, 186, 188
and Y2K problem, 210–211, 215 (
See also
Commercial banks; Investment banks)
Barron’s
133, 233, 244, 248
Bartiromo, Maria, 322
Barzun, Jacques, 63–64
Baum, Caroline, 293, 348
BEA (
see
Bureau of Economic Analysis)
Bear Stearns, 125, 272, 275, 321, 332, 346, 347
n
.48
Beckner, Steven, 116, 142, 143
Being There
(Jerzy Kosinski), 75, 119
Benjamin, Keith, 231
Beresford apartments (New York City), 352–353
Bergen, Candice 75
Bernanke, Ben, 151, 186, 263,
287–288, 292, 299, 302, 303, 310–312, 325, 330–331, 333–335, 338, 346–347, 359, 361
refers to debt as “wealth,”
208, 307, 308
“Bernanke put,” 306,338
Bernstein, Carl, 74
Berry, Scott, 279
Bitsberger, Tim, 272
Blackstone Group, 311–312,
317–318, 320
Blankfein, Lloyd, 354, 356
Blessing, Karl, 37–38
Blinder, Alan, 137–139, 159, 297 Blodget, Henry, 198, 232, 233, 248 BNC Mortgage Incorporated, 274 Bond market:
by 1987, 115
in 1990s, 169
leveraging in, 125–126
Bonds:
inflation-indexed, 147
yields on, 72
Bono, 353
Boskin, Michael, 147
Boskin Commission, 146–149, 152 Bosworth, Barry, 148
Bowie, David (securitization), 164–165
Branden, Barbara, 27, 339
Branden, Nathaniel, 3, 14–15, 21, 27, 300, 339, 362
Bresciani-Turroni, Constantino, 301 Bretton Woods Conference (1944), 22, 41
Broadcast.com, 174
Broaddus, Al, 262–263
Brooks, John, 36, 319–320
Bruck, Gilbert, 16, 351
Bubbles:
asset, 289, 302–303
and central banks, 203, 204
credit, 302, 319
Greenspan’s statements on, 192, 203–204, 285, 350
in housing market, 245, 261, 311, 333, 343
in mortgages, 331
stock market, 145, 155, 160–164, 169–178, 191–210, 285–286 Buchan, James, 281
Buchwald, Art, 75
“Bulldog” (repo man and credit adjuster), 165
Bundesbank (
see
German
central bank)
Bunning, Jim, 163, 164,
227–229, 348
Bureau of Economic Analysis (BEA), 153, 197, 200, 218, 219,
230, 230
n
.11
Bureau of Labor Statistics, 147, 149, 150, 152
Burke, James, 200
Burns, Arthur, 3, 12–14, 21, 32, 37, 40, 41, 42, 44, 48–50, 65, 66
n
.25, 114, 147, 201, 300
Bush, George H. W., 69, 70, 122–123, 306, 323
Bush, George W., 247, 278, 308, 339
BusinessWeek,
52–53, 54, 55, 60, 81, 209–210, 233
Butz, Earl, 56

C
California real estate, 63, 86–87, 88–91, 165, 273, 274, 279, 289, 292, 293, 295, 331
Campbell, Kirsten, 233
Capital, 364
Capitalism, 362–364
Carlyle Group, 323
Carry trade, 125–126, 128, 162 in 2006, 313
in late 1990s, 166
Carter, Jimmy, 62–63, 67, 77
Casey, William, 69
CDOs (collateralized debt
obligations), 313–314
CDS (credit default swaps),
314–316
CEA (
see
Council of Economic Advisers)
Central banks, 126
1998 rate cuts by, 195
and bubbles, 203, 204
currencies degraded by, 305–306 and price stability, 287, 298
(See also specific banks)
Centrust Savings Bank (Miami, Florida), 89
CEOs (
see
Chief executive officers)
Chambers, John, 235
Chase Manhattan Bank, 112
Chemical Bank, 35
Chicago, Ill, 45, 295
Cheney, Richard “Dick,” 54, 300
Chief executive officers (CEOs), 128, 235, 318
Chinese central bank, 308–310
Chrysler, 62, 246
Churning, in mortgage markets, 262
Cisco Systems, 177, 207, 216, 235, 237, 238, 243, 248
Citicorp (Citigroup), 78, 79, 114–115, 275, 276, 347
n
.48, 354
Clark, Jim, 141
Clinton, Bill, 136–138, 142, 143, 216–217, 323, 339
Clinton, Hillary, 339
CMBS (commercial mortgagebacked security) market,
273–274
CMOs (collateralized mortgage obligations), 130
CNBC, ix, 55
n
.33, 64, 104, 119, 193, 198, 212–213, 297, 322, 342
Cohen, Abby Joseph, 174–175, 208, 232, 248–249
Cohen, Steve, 324
Collateral, LTCM failure and, 185
Collateralized debt obligations (CDOs), 313–314
Collateralized mortgage obligations (CMOs), 130
The Collective, 14–15
Columbia Savings and Loan (Beverly Hills, California), 89, 90, 93
Columbia University, 12, 27, 28, 333
Commercial banks:
bailouts of, 72, 78–79
derivative contracts held by, 312 in early 1990s, 125
mortgages held by, 312
Commercial mortgagebacked security (CMBS) market,
273–274
Commercial paper 90, 117, 306
Community Reinvestment Act (1995), 273, 277
Computer industry:
in 1997–1998, 197–198
in 1999, 207
profit losses in, 218
Computer prices, adjustment of, 153, 230
Conference Board, 13
Conglomerates, 33–36, 349
Consumer debt, 251–258
in early 2000s, 271
in mid–1990s, 134
renewing economic growth through, 311
(
See also
Mortgages)
Consumer Price Index (CPI):
in 1960s, 39
calculation of, 147–152
changes to, 50
and inflation of asset prices, 170–171
Consumer spending, economic growth and, 291, 292, 311
Consumerism, 22, 51, 52, 63
Continental Illinois National Bank and Trust, 78–79, 306
Cooper, Sherry, 344
Coraine, Richard, 355
Corporate bonds, yields on, 72 Corporate (business) debt, 99, 134
Corporate executives, priorities of, 209–210
Corporate growth, 77
Corporate profits:
as measure of productivity, 197 and price of stocks, 175, 177–178, 194, 216
Council of Economic Advisers (CEA): under Carter, 61
under Ford, 5, 47, 50, 52–57, 97
under Kennedy, 26
Counterparty risk, 182
Countrywide Bank, 334
Countrywide Credit, 165, 279
Countrywide Financial, 271, 273, 277, 347
n
.48
CPI (
see
Consumer Price Index)
Cramer, Jim, 208
Cranston, Alan, 85
Credit:
in 1960s, 34, 37
in 1970s, 48
in 1980s, 77
in 1990s, 166
in 1999, 209
in 2001, 245
from 2005–2007, 312
consumer, 252–257
expanded access to, 296
and Great Depression, 352
and house prices, 290
inflation in, 173
from investment banks, 125 as liquidity, 363
at mid-century, 21, 22
and recession of early 1990s, 124 and rise in corporate/consumer debt, 134
worldwide bubble in,
302, 319
Credit default swaps (CDS), 314–316 Credit-rating agencies, 270, 271, 314 Crime, inflation of 1970s and, 44–45 Crime, appraisal fraud, 280
Crocker, Donald, 86, 87

D
Dallas Federal Reserve Bank, 288
The Darwin Awards,
236
Daily Telegraph (London), 341, 344 Davis Polk & Wardwell, 116
Day trading, 169, 211
D.E. Shaw & Company, 323
DeConcini, Dennis, 85
Deflation, 287–288, 359
de la Renta, Françoise, 75
de la Renta, Oscar, 75
Dell Computer Corporation, 130,

207, 216
Depression, deflation and, 285–286 Deregulation of banking,

99–100, 102

Derivatives, 111, 190
in 2007, 303
Congressional hearings on, 131 credit default swaps, 314
and fed funds rate, 130
Greenspan’s understanding of,

189–190, 343
held by commercial banks, 312 in late 1990s, 164–165
and LTCM failure, 183
mortgage securities, 273
and recession of early 1990s,

124–125
risk of, 131
synthetic CDOs, 313

Deutsche Bank, 300, 345
Dillon, Douglas, 26, 77
Dingell, John, 115
Discount rate, 1987 stock market

crash and, 112–113
DJIA (
see
Dow Jones Industrial
Average)
Dollar(s):
in 1980s, 72
and Asian financial crisis, 172–173 and gold standard, 22, 38, 41 and positive inflation, 288
recycled into Treasury securities, 309
shorting, 316–317
value of, 1–2, 5
as world’s reserve currency, 49
Dow 36,000
(James K. Glassman and
Kevin A. Hassett), 198
Dow Jones Industrial Average (DJIA),
19, 29, 72
and 1987 stock market crash,
110–112
in 1999, 198
in 2000, 219
in 2009, 257
in mid–1970s, 43
Drexel Burnham, 80, 116, 117
Drexel Burnham Lambert, 117 Dunbar, Nicholas, 186