Tweet me!People may blame Greenspan for his low rate policy, but at least he had the balls to come out and declare how irrational market behavior was when it was irrational. Reference the Irrational Exburance speech during the dot.com days, which apparently was not nearly as bad as the Asset Securitization bubble days we see before us.
Greenspan's comment was made on December 5, 1996 (emphasis added in excerpt):
[...] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? [There goes that Japanese thing again - Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?...]
You do know how the dot.com bubble ended, don't you? These guys/gals at the Fed are a step and a half away from condoning it.
And on this note of credibility, Geithner at the NY Fed said that he was not in the position to force counterparties to take less than the contractual 100% payout of CDS despite AIG's highly distressed situation. We will ignore the fact that highly distressed entities negotiate discounted payouts EVERY SINGLE day (we will not even broach what happens in bankruptcy), and that this is normal business in a capitalistic society, of which I am increasingly doubting this country as a card carrying member. Let's focus on the fact that at least one foreign counterparty actually OFFERED to take a reduced payment, and Geithner said NO! He literally opted to have Reggie Middleton pay AIG's full liability because Reggie (at least to him) obviously needs to carry a higher tax liability and suffer a lower standard of living. You see, Mr. Geithner doesn't believe that Reggie's 18 and 19 hour workdays are LONG enough!
From Bloomberg: Fed AIG Rescue Faulted by Inspector for Limited Effort on Bank Concessions
Timothy Geithner, now Treasury Department secretary, led the New York Fed when it negotiated with the banks in November 2008. The Fed contacted eight of AIG’s biggest counterparties to ask for discounts, Barofsky said. Only Zurich-based UBS AG was willing to take a haircut, a 2 percent discount, and that was under the condition other banks agreed to similar terms, Barofsky said. The Fed decided that all counterparties would receive full payment.
The French bank regulator, overseer for Societe Generale and Credit Agricole SA’s Calyon, “forcefully asserted” that the banks couldn’t accept less than full value on swaps unless AIG went bankrupt, Barofsky said. Because the Fed had already committed to preventing an AIG collapse, regulators had reduced leverage in negotiations, he said. Other counterparties included Merrill Lynch & Co., Barclays Plc and Bank of America Corp.
Why commit to save AIG? The Fed should commit to save the US taxpayer, not AIG. The world would not have came to an end if said counterparties didn't get paid in full. Simply don't pay them in full! AIG didn't have the cash, it would not have been hard. The Fed should have supervised the states taking control of the truly state regulated insurance entities (which probably were shielded) and contolled the systematic dismantling of AIG - which is essentially what is happening anyway, just after the taxpayer has been raped, as opposed as before.
Before the Fed stepped in, AIG tried to persuade banks to accept haircuts of as much as 40 cents on the dollar, according to people familiar with the matter. The Fed’s decision to pay the banks in full may have cost taxpayers $13 billion, or 40 percent of the $32.5 billion AIG paid to retire the swaps. AIG paid the market price of $29.6 billion for the mortgage-backed assets that were protected by the derivatives.
...
AIG’s rescue includes a $60 billion Fed credit line, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.
Barofsky faulted the Fed for its initial refusal to name AIG’s counterparties or how much they received. The Fed said in March that releasing details could harm AIG and later released the data under pressure from Congress.
“Notwithstanding the Federal Reserve’s warnings, the sky did not fall,” Barofsky said. “The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds.”
The guys at Austrian Filter have simply put my thoughts in a timeline. I don't usually reproduce posts from other blogs, but this one is precious [annotation in red are my comments]:
Zero Credibility from the Austrian Filter
Straight from the horses' mouths, a quick time line of Paulson's & Bernanke's economic assessments:
February 28, 2007 - Dow Jones @ 12,268
March 13th, 2007 - Henry Paulson: "the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained." A total lack of understanding of what caused this problem. It was never subprime, it was a dearth of underwritng prudence, which means that the losses will appear everywhere a loan was underwritten (or not underwritten). That is any loan, anywhere. A lot of loans in a lot of places. I think we are figuring this out by now, but my blog readers knew this back in 2007, and profited from it. See the Asset Sercuritization Crisis links at the bottom of the post.
March 28th, 2007 - Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Same problem as above
March 30, 2007 - Dow Jones @ 12,354
April 20th, 2007 - Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom," Same problem as above
April 30, 2007 - Dow Jones @ 13,063
May 17th, 2007 - Bernanke: "While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S." Same problem as above
May 31, 2007 - Dow Jones @ 13,627
June 20th, 2007 - Bernanke: (the subprime fallout) ``will not affect the economy overall.'' Same problem as above
July 12th, 2007 - Paulson: "This is far and away the strongest global economy I've seen in my business lifetime." This goes to show you the quality of Paulson's business lifetime!
August 1st, 2007 - Paulson: "I see the underlying economy as being very healthy," He was probably just lying!
October 15th, 2007 - Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions." He is right. To be honest, he was probably hamstrung between a rock and a hard place, but it really looks bad to have this thrown in your face in public, doesn't it???
December 31, 2007 - Dow Jones @ 13,265
January 31, 2008 - Dow Jones @ 12,650
February 14th, 2008 - Paulson: (the economy) "is fundamentally strong, diverse and resilient." Well, if you look at it from a conceptual perspective...
February 28th, 2008 - Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street." Right, everything is going according to plan...
February 29th, 2008 - Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." Ignorance right here. He really should have been reading my blog. I told him Bear Stearns was going to fail and Lehman had issues the month before - Is this the Breaking of the Bear? Sunday, 27 January 2008
March 16th, 2008 - Paulson: "We've got strong financial institutions . . . Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."
March 18th, 2008 - Bear Stearns Bailout Announced - I told you so, right on schedule...
May 7, 2008 - Paulson: 'The worst is likely to be behind us," Need I comment???
May 16th, 2008 - Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said. That's what anybody who relies on his judgement espoused in public deserves. I know a few people who are enamored with Fed and Treasury pronouncements... What a shame.
May 30, 2008 - Dow Jones @ 12,638
June 9th, 2008 - Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned, Okay, if you say so...
July 16th, 2008 - Bernanke: (Freddie and Fannie) "...will make it through the storm", "... in no danger of failing.","...adequately capitalized" The ultimate contrarian indicator...
July 20th, 2008 - Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation." And to think, some people dismiss me because I had bad quarter....
July 31, 2008 - Dow Jones @ 11,378
August 10th, 2008 - Paulson: ``We have no plans to insert money into either of those two institutions." (Fannie Mae and Freddie Mac) That reminds me of the joke where the bill collector calls and asks when he can expect payment. The guy on the other end of the phone says, "You can EXPECT payment whenever you damn well please!"
September 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation's balance sheet. Whoa!
September 16th, 2008 - $85 Billion AIG Bailout "Loan" Whoa! again.
September 19th, 2008 - $700 Billion Bailout Plan Announced Whoa! cubed...
September 19th, 2008 - Paulson: "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system." The mathematically challenged Treasury Secretary and ex-Goldman CEO, or does he think we are mathematially challenged?
September 19th, 2008 - Bernanke: "most severe financial crisis" in the post-World War II era. Investment banks are seeing "tremendous runs on their cash," Bernanke said. "Without action, they will fail soon." There it goes. Should we expect a similar reversal on the Green Shoots Theorem as well?
September 21st, 2008 - Paulson: "The credit markets are still very fragile right now and frozen", "We need to deal with this and deal with it quickly.", "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing." I really shouldn't comment any further...
September 23rd, 2008 - Paulson: "We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses, both small and large, and the very health of our economy," Whoa! to the fourth degree
September 23rd, 2008 - Bernanke: "My interest is solely for the strength and recovery of the U.S. economy," Why doesn't the Fed and the Treasury spend some of that TARP money to spring for a subscription to my blog?
October 31, 2008 - Dow Jones @ 9,337
March 31, 2009 - Dow Jones @ 7,609
The authors of this very interesting blog post conclude: If Bernanke and Paulson were doctors, and our economy was the patient, they would be in jail for malpractice. If they were graded for their performance in public, they would have failed, if they had a private sector job, they would have been fired. If they were attached to a lie detector with 500 volt biofeedback, they would have been electrocuted!
I've commented on the accuracy of these guys' statements many time in the past:
