This morning's business news featured live feeds of former Fed Chairman Alan Greenspan defending himself during testimony before a House Banking committee.
Although video of this historic moment is not yet on YouTube, I'd bet it is by tomorrow morning.
In a stunning series of remarks, Greenspan alleged surprise that individual, self-interested players in the financial markets did not have an explicit sense of, and desire to maintain, the overall health of those markets as they knowingly engaged in risky activities, e.g., securitizing subprime and Alt-A mortgages.
To cap off his inane comments, Greenspan defended his beliefs and inaction by claiming that his 40+ year "ideology" regarding capital markets turned out to be wrong.
According to Alan, his correctly-functioning model of how markets worked went wrong in the past few years, so it's not his fault.
Moreover, in earlier remarks this morning, he asserted that he believed the operating models of various financial markets competitors were correct, but they just used 'bad data,' and, when replaced with proper data, would result in appropriate decisions and actions regarding risks.
I will be the first one to say that anyone, especially a Fed Chairman, who believes that individual players in financial markets ever look out for the system, or the 'other guy,' is an idiot.
If any sector requires careful and effective regulation, it is our financial sector. My own recommendations for reforming the current financial mess, written on September 23rd of this year, featured three prescriptions for stiffer regulations concerning leverage, exchange-based trading, and retention of securities on an underwriter's balance sheet. Only one recommendation involved loosening a current regulation, and that was to reverse Congress' misguided mandate for all firms to strictly adhere to a narrow usage of 'mark-to-market' pricing of assets, while overlooking the real value inherent in a performing, if untraded security.
Nobody who has been involved with actual banking, securities or the markets can possibly believe they need no regulation, or that any player gives a hoot about systemic issues. That is always 'someone else's' problem.
Thus my posts regarding greed and stupidity, here and here.
Here's a good example.
Back in 1990, I ran a small internal consulting group at Chase Manhattan Bank. It was also given the task of commercializing the tools we used internally. With the forced retirement of my mentor and SVP of Corporate Planning & Development, I reported to the bank's CFO.
As such, I was included in a lunch for all the CFO's direct reports in late 1990 to discuss the brewing commercial real estate problems at the bank.
What I heard was shocking. The CFO wondered aloud if we could have afforded not to compete for all these soured loans, at the height of the lending frenzy. He was fixated on revenues and market share, and seemed genuinely ignorant of the looming large chargeoffs from the excessive lending.
Later, I learned from some colleagues working directly for the CFO that when a post-mortem on the Real Estate Finance division was conducted, many loan documentation folders were literally either empty, or contained a few mostly-blank pieces of paper.
The minimum necessary paperwork for review and approval by loan committees and internal credit audit functions was nonexistent.
Nobody could explain this violation and failure of basic internal bank lending practices. But we all knew why it had happened. Bonuses for the senior management and loan officers of the unit were huge for the last two years of the lending boom.
Nobody gave them back. The bank bore the losses, while the former employees walked off with millions of dollars of 'performance' bonuses.
It's simply human behavior. Salespeople and managers will maximize that behavior which pays them the most money. They will short-circuit, corrupt or remove any checks and balances they can which interfere with that profit-maximizing behavior.
To assume otherwise, either at the business-unit level, corporation level, or among players in banking and financial markets, is to be naive and stupid.
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