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There's nothing quite like the misfortunes of others to cheer us up. The Northern Rock crash dented Britain's shiny financial motor, after it had left the European models in the dust and just when it was pulling ahead of that flashy American number. Since then, though, the problems have multiplied, with the fiasco of SocGen's rogue trader, the life-threatening losses at UBS, and now the blow-up at Bear Stearns.
You may need a heart of stone not to laugh at the plight of the Bear, after it had declined to join in the rescue of Long-Term Capital Management a decade ago. Yet it did try to take on the bulge-bracket behemoths that dominate this world and have made those at the top of them so stupendously rich.
The investment banks were skewered by Philip Augar in The Greed Merchants, and as he points out, Bear Stearns was the only firm in modern times to challenge their hegemony, working its way up the top 10 investment banks as an independent. The staff are big shareholders, and "Ace" Greenberg, its former chairman and driving force, ordered the re-use of envelopes and paperclips "to make our people conscious of expenses".
It's not expenses that bust banks but the drying-up of credit when the lenders don't believe they'll see their money back, as Bear Stearns has found out the hard way. This is also why the prices of British banks like HBOS or Alliance & Leicester swing so wildly. If they run out of credit, they're finished; if they don't, the shares are dirt cheap.
How have we got here? If any one man is to blame, it's surely Alan Greenspan, the chairman of the US Federal Reserve until 2006. While Lord (Eddie) George has hardly opened his mouth in public since retiring from the Bank of England, Greenspan has published a 500-page book of his experiences, and scarcely lets a week go by without another apologia. He's now moaning about imperfect models of risk in financial systems which are too complicated for poor central bankers to grasp.
Writing in the FT, he's noticed that this crisis is "the most wrenching" in 60 years, and talks about the US housing bubble. Yet he was the man who blew up this bubble, all the while denying that he was doing any such thing. The very low interest rates he imposed seduced millions of vulnerable people into buying homes they could afford only if rates stayed low and the prices continued to rise.
Unlike commercial property with its rental stream, residential property can only be valued by what the house next door has just sold for. If half the houses in the street are boarded up, yours is almost worthless. There are areas of American cities like Detroit where this has already happened.
The cheap debt peddlers who advanced the subprime (or worse) loans may look like the bad guys, but they needed the fuel of rock-bottom official interest rates to power their securitised vehicles before bundling up the dodgy assets and selling them on.
Their profits from Greenspan's profligacy are now safely banked - if such a thing is possible in today's climate - and others must clear up the human and financial mess he's left behind.
This is not too complicated to understand, and if he can't bear the thought of admitting he's to blame for today's financial meltdown, a decent period of silence from him would be appreciated.
Reader views (1)
Hello, Neil. So you're still alive and, of course, kicking. Good to know you have your sights on the main architect of the present financial problems. Things can only get worse, so that's something to brighten my day.
- John Houlihan, London, England, 15/06/2008 09:40
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