Cupertino, Calif.
ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”
But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.
I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality.
Meanwhile, home buyers, convinced by recent history that real estate prices would always rise, readily signed onto whatever mortgage would get them the biggest house. The incentive for fraud was great: the F.B.I. reported that its mortgage fraud caseload increased fivefold from 2001 to 2004.
At the same time, I also watched how ratings agencies vouched for subprime mortgage-backed securities. To me, these agencies seemed not to be paying much attention.
By mid-2005, I had so much confidence in my analysis that I staked my reputation on it. That is, I purchased credit default swaps — a type of insurance — on billions of dollars worth of both subprime mortgage-backed securities and the bonds of many of the financial companies that would be devastated when the real estate bubble burst. As the value of the bonds fell, the value of the credit default swaps would rise. Our swaps covered many of the firms that failed or nearly failed, including the insurer American International Group and the mortgage lenders Fannie Mae and Freddie Mac.
I entered these trades carefully. Suspecting that my Wall Street counterparties might not be able or willing to pay up when the time came, I used six counterparties to minimize my exposure to any one of them. I also specifically avoided using Lehman Brothers and Bear Stearns as counterparties, as I viewed both to be mortally exposed to the crisis I foresaw.
What’s more, I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.
I believed that the collapse of the subprime mortgage market would ultimately lead to huge failures among the largest financial institutions. But at the time almost no one else thought these trades would work out in my favor.
During 2007, under constant pressure from my investors, I liquidated most of our credit default swaps at a substantial profit. By early 2008, I feared the effects of government intervention and exited all our remaining credit default positions — by auctioning them to the many Wall Street banks that were themselves by then desperate to buy protection against default. This was well in advance of the government bailouts. Because I had been operating in the face of strong opposition from both my investors and the Wall Street community, it took everything I had to see these trades through to completion. Disheartened on many fronts, I shut down Scion Capital in 2008.
Since then, I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins.
Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.
As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word.
Unfortunately, he did not give good advice. In February 2004, a few months before the Fed formally ended a remarkable streak of interest-rate cuts, Mr. Greenspan told Americans that they would be missing out if they failed to take advantage of cost-saving adjustable-rate mortgages. And he suggested to the banks that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”
Within a year lenders made interest-only adjustable-rate mortgages readily available to subprime borrowers. And within 18 months lenders offered subprime borrowers so-called pay-option adjustable-rate mortgages, which allowed borrowers to make partial monthly payments and have the remainder added to the loan balance (much like payments on a credit card).
Observing these trends in April 2005, Mr. Greenspan trumpeted the expansion of the subprime mortgage market. “Where once more-marginal applicants would simply have been denied credit,” he said, “lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”
Yet the tide was about to turn. By December 2005, subprime mortgages that had been issued just six months earlier were already showing atypically high delinquency rates. (It’s worth noting that even though most of these mortgages had a low two-year teaser rate, the borrowers still had early difficulty making payments.)
The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.
Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool — the epic and unfair taxpayer-financed bailouts. Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.
It did not have to be this way. And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis. Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat. If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.
Tampa Gold says:
What?!
No linky to his UCLA commencement speech?
Speech, SPEECH!
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25th June 2012 at 1:29 pm
backwardsevolution says:
Greenspan knew, so did Bush when he gave his “let’s get America into housing” speech, so did Wall Street.
Knowledge proves “intent,” the very thing necessary to bring charges. When you throw your hands up in the air and say, “I’m shocked this happened, I didn’t see it coming,” people don’t know what to think. They can’t get a handle on your motives.
The intent from the beginning was to promote a huge mother of a housing bubble, rake in the profits on the way up, claim innocence when the bubble collapsed, rake in more profits on the way down and THEN on the way back up again.
When they swear in the next Chairman of the Federal Reserve, they should pointedly ask him what are the specific things that cause bubbles, exactly what to look for, and then fire him the first time he looks the other way.
The title of the article says it all: “Don’t Dare Tell the Truth”.
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25th June 2012 at 1:30 pm
backwardsevolution says:
After the stock market collapse in the early 2000′s, even Krugman called for a housing bubble by saying:
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Made to order!
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25th June 2012 at 1:35 pm
Administrator says:
TG
I posted the video over the weekend. Keep up man.
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25th June 2012 at 1:41 pm
Muck About says:
TPTB wil crush you like a bug if you should attract too much attention to the fact that they are screwing us all..
During the Savings and Loan scandal, the US Attorney General investigated and brought over 1700 bank officers to trial or indictment over crooked deals, put asses in jail and fined them right and left.
During the ever so larger and much more criminal actions of banks, mortgage companies, title companies in 2006 thru the crash in 2008, our Attorney General has investigated ZERO number of people, has not brought one banker, finance officer or mortgage officer before a Grand Jury and NO ONE has gone to jail over the biggest criminal rip off and destruction of american public wealth in the history of our poor country.
RIP America, so many ways. We are no longer free in any sense of the word and can only look forward to a corporate fascist Government when the credit collapse happens. Very soon, the Fed will loose control of interest rates and bankruptcy will be the word of the day.
RIP America. It’s been nice to know you when you were free.
MA
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25th June 2012 at 6:00 pm
Ron says:
Greenspan was always good for a laugh,he would talk really slow and if he coughed the market would get the jitters.Funny how many so called well educated experts make so many mistakes.
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25th June 2012 at 7:47 pm
Yojimbo says:
“How can I make a nation of men, when they will ever be sheep?” Oliver Cromwell
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25th June 2012 at 8:08 pm
Muck About says:
Funny about Greenspan. He was an Ayn Rand acolyte, knew at a young age exactly what was going on as far as money was concerned. The older he go, the higher he moved in Government circles, the more he allowed his soul to be bought by vested interests and was suitably rewarded with positions of more power.
As Fed chair, he totally sold his soul to the establishment in order to perch on the highest economic twig there was. As Fed Chairman, he was top dog in the world, more powerful than any other central banker and held the economic activity of the United States in his palm.
So he sold his soul for money and power – not an unusual thing to do for a human being when the opportunity arrises.
He knew that abandoning the international gold standard would lead to devaluation of the dollar. He supported Nixon in this because that meant survival at the cost of impoverishment of the United States – which we are now beginning to experience.
As far as I’m concerned, Alan Greenspan is a total traitor to this country and should be strung up by his neck until dead. It’s one thing to be stupid and blunder into bad things, but to know from the very beginning that your actions would cause disastrous consequences is grounds for skinning alive.
I hope he rots in whatever hell he believes in, doomed to listen to the howls of the lost souls who suffered and died because he allowed the countries currency to depreciate even when he knew that was what he was doing and could have prevented it. He’s a worthless asshole and better he had never been born.
MA
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25th June 2012 at 9:34 pm
SAH says:
The Real Estate Bubble was just America’s version of the massive empty Chinese ghost cities they keep building to boost their GDP. Since China imposes strict lending standards (often 50% down payment and shorter loan terms of 10 years) their massive cities stay at 75%+++ unoccupied, but they keep building 10-20 of these cities equipped to hold millions of people every year, just to build. China has 64 million unoccupied housing units that no one can afford. But the central government keeps ordering builds. Why? To stimulate the economy. They build massive empty cities just to build. Our
Own subprime mortgage fiasco was our banks lending just to lend. This fueled a lot of false wealth, but ultimately it was all as empty as the Chinese mega ghost cities. The banks, bailout, Fanny, Freddy, Barney Frank, Al Greenspan, all of it was a centralized government cesspool of market manipulation. We are just as communist and non-free market as China.
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25th June 2012 at 11:59 pm
Novista says:
Trivia …
After trashing Bretton Woods, Nixon in December, 1971 increased the official price of gold from $35/oz. To $38 – again, February 12, 1973 he devalued the dollar yet again, setting the official gold price at $42.22
The ‘official’ gold price is still at that figure, despite the reality of the market. In 1979, TWA ‘lost’ a shipment of Krugerrands from Franklin Mint. In Frankling Mint v. Transworld Airlines, the Supreme Court ruled that gold bullion values in commerce were capped at the official price, Such is life.
Trivial …
“The excess credit the Fed pumped into the economy spilled over into the stock market — triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too little too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.”
snip from 1966 essay Greenspan wrote … like Muck said.
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25th June 2012 at 1:15 am
flash says:
SAH
There was life before the US currency reserve and there will be after it’s demise.
China is planning ahead of the looming energy crunch. It has a population of 1.4 billion people and growing.
They are merely allocating their assets to meet that crunch by building new and improved infrastructure along with efficient high speed rail.
More people =less land available for agriculture, hence the need for high density housing to get people off the land and high speed rail to get them back onto the land for a hard days work in the fields.
When the time comes to move,the Chinese government will not ask the peasants to move off the land , they will be told.
Capitalism only exists in China as long as that government says it does.
And money is what ever the Communist Party says it is.
In the advent of a US reserve currency collapse, the US markets are no longer any use to China, and they know this hence their investment in the future cities.They’re already turning their production inwards.
And for further speculation, hardship and internal strife is no stranger to the Chinese ruling class….no communist party member has ever starved to death.And what’s a few millions dead peasants to a party member…simply the price the population pays for the price of admission to the great society.
So while the Chi-Coms are taking their debt based dollars and investing in the future via gold , infrastructure and cheap transportation , the western governments are bailing out the debt creators whilst our the infrastructures of out nations cities and towns , crumble and rot.
The Chinese are survivors and survivors always have a plan.
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25th June 2012 at 8:53 am
sensetti says:
Flash are you saying the empty cities in China are part of an overall plan. I have never heard anyone say that but It makes sense, if they are that smart and forward looking we are trouble. I better start learning Mandarin as part of my prepping.
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25th June 2012 at 9:17 am
flash says:
sensetti, that’s exactly what I’m saying.
In talking with a relative that travels back and forth between China and his German funded US based mfging business I find he agrees with my assertion. Millions of Chinese workers rent small bedrooms that already have 10 to 20 occupants all working at the same factory.
I doubt it would take much of a push to get these workers to mover to the shiny new cities where their work will likely be assigned according to their skill set.And like my relative says , they will not be asked to move politely.
Think Ayn Rand’s Anthem
Money is player pieces in the game, It’s hard assets via resources at the end the game which determines the winners.
And don’t think the Chinese are the only one pursuing the goal of relocating people form the land to free it up for only agriculture or wildlife use.
See Agenda 21 and the wilderness Project.
We the US have bought into this command and control society big time with states appointing regional planning commissions, drafting land use smart growth plans with designated job zones throughout the USA.
And ,in the circle jerk of so called representative government , I hear no opposition to this top down planned society from either party.
Even with the economy in the tanks these statist tools still want to limit what jobs can and cannot be created in specific job zones.
It’s funny hearing the incessant blather of free trade is good for US from the globalist oriented milksops on both sides of the aisle , but let an average middle class American attempt to start up a small manufacturing plant and every barrier imaginable is thrown up, from two to five years of zoning hearings and appeals , to safety test/impact studies , licenses , permits ..blah …blah..and all on these wannabee start-ups dime.
You’d just about have to have a grudge against your own well being to attempt to start-up even a shoe shine business in this command and control economy.
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25th June 2012 at 10:39 am
flash says:
The red area are designated little or no Nahum use.
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25th June 2012 at 10:45 am
flash says:
For a good laugh, check out the very limited normal use zones on the map designated as zones of cooperation.
And if one is not cooperative, what then?
http://www.iclei.org/index.php?id=798
BTW , my swarmy GenX libtard neighbors actually wrote some of this anti-liberty -we are the borg-gibberish and have been extremely successful at putting family ran logging and saw mills operations completely out of business….and are actually proud of ruining peoples financial and personal lives.
Their last conquest was to shut down the construction of a local coal burning electrical plant that would have created 2 thousand jobs….wrong job zone.
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25th June 2012 at 10:59 am
SAH says:
@Flash… No, I’m sorry but the mega ghost cities are not being built for a ‘plan’ of anything other than to artificially continue boosting China’s GDP on paper. They built ‘the great mall’ in the early 2000s, largest in the world. It stayed absolutely vacant. They recently started demolishing it, but continue building cities equipped to hold 1-12 million people. Many of these cities have already been vacant for +10 years, but still they build. My point was, china is not a free market.
These cities would NOT get built in a free market, since there is no demand. With the average Chinese making around 6000 USD per year, maybe a free market would build more affordable housing (instead of 64 million completely empty luxury condomnium homes priced in the 75000-400000 USD range). Maybe a free market would improve housing in crowded Chinese cities where people live and work, instead of building massive new empty luxury cities in vast empty tracts of the Mongolian Steppe. Who knows, but a free market would be responding to demand. A free market would stop building. A free market would let those giant construction companies and workers be out of a job, or figure out something else to do. True freedom is the freedom to succeed OR fail. China is a top-down central government that controls its markets and keeps everything nice on paper. The GOVERNMENT has decided if construction stops due to supply/demand that it would be too big a loss of GDP, that too many ‘too big to fail’ real estate developers and construction firms would take a hit, and that it would negatively effect their overall economy. So, they neglect the ACTUAL need for affordable housing and better infrustructure in cities where actual Chinese people live, and focus investing in building new, empty cities and infrastructures no one uses (and it seems they are now adding demolition to the life cycle of the mega ghost cities… But occupancy is still NOT). The Central Government makes economic policy to benefit it (big fake GDP) and large corporate cronies at the expense of actual real common people. Does this sound frighteningly familiar to you? Does it sound GOOD to you? You must be one of the people who loved TARP. Too big to fail? No such thing… There is only ‘not free enough to fail’. We are just like China (our Central Government and Fed Reserve and largest Corporations hold a black cabbal of market manipulation and top-down central control… Just like Commie China.)
For that matter, we are beginning to resemble North Korea as well… FEMA camps, bullet proof hwy check points and hollow points ordered by DHS this year, TSA… Restrict movement, put dissenters in camps… Obama with the new power to violate Posse Comitus and detain or kill any citizen using military against citizens. Hmmm… Maybe I should move to the far East. We are at about the same level of freedom and form of government at this point. Difference is, they are moving toward freer markets and governments, and we are moving away from it. We aren’t freaking American anymore. We are the central-government, party-line-toeing Commie assholes our grandparents would have kicked the shit out of. Which brings me to my favorite subject – Boomers. Commie Boomers like Obama’s Mama and their subversion of free market freedom based American values. I’ll leave it at that.
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25th June 2012 at 11:29 am
flash says:
SAH-These cities would NOT get built in a free market, since there is no demand.
Exactly my point.The demand is keeping the state in power
SAH-maybe a free market would build more affordable housing (instead of 64 million completely empty luxury condomnium homes…..would improve housing in crowded Chinese cities where people live and work, instead of building massive new empty luxury cities.
BTW, what makes you think all the housing in these ghost cities are luxury condos?
When the cheap crap market inevitably tank those vast cities of factory workers will be put to work in sustenance agriculture.
I imagine you’ve heard the Great Leap Forward was no picnic for a the Chinese peasant wherein and estimated 30 million to 40 million died, but now that the Chinese population has more than doubled since the end of the GLF in 1962 where do you think these peasants will go when their manufacturing starts to dry up due to a global economic meltdown?
Do you think that they’ll just be allowed to wander off into the country side and start survival farming?
SAH-China is a top-down central government that controls its markets…
By controlling it’s people.
Here’s the thing, SAH, if you’re smart enough to figure out that these state controlled economies will eventually go bust, don’t you think that the state sponsored intelligentsia are as well.
Peak populations+ peak energy+ collapse of the fiat dollar = 19th century or earlier standard of living hence more labor intensive agricultural methods.
Pack the people into the cities and utilize cheap massive transportation to move them back and forth between their job in the field.That’s the only model they have left.
The cheap energy bubble won’t last forever.
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25th June 2012 at 1:14 pm
flash says:
SAH-We are the central-government, party-line-toeing Commie assholes our grandparents would have kicked the shit out of.
You mean like the Greatest generation of tools did Stalin and his Red Army?Or closer to home, how about the rooting out the commies in the FDR or Truman governments?
Have you not heard of the Venona Cables?
Yeah, it was those mangy cur boomers that sold US out, way back in ’48.
http://www.nytimes.com/books/first/h/haynes-venona.html
http://www.theobjectivestandard.com/issues/2012-spring/review-ann-coulter.asp
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25th June 2012 at 1:22 pm