Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (16 page)

In later years, Greenspan would control such quibbles, but not this day. He replied to Proxmire: “[T]hat is not my recollection of the way the forecasts went.” Proxmire then read the projections to Greenspan. The candidate admitted: “Well, if they’re written down, those are the numbers.”

Greenspan had an excuse:

GREENSPAN: “There is a very substantial difference, Senator, between forecasting in the Administration and forecasting outside.”

PROXMIRE: “I sure hope so!”

Greenspan then embarked on the gobbledygook so familiar during his chairmanship. Proxmire waited patiently and then responded:

PROXMIRE: “[E]very one of the chairmen of the Council of Economic Advisers had the same problem, and they didn’t miss by as much as you did, not nearly as much.”

GREENSPAN: “I feel sorry for me and happy for them.” Proxmire, perhaps having anticipated Greenspan’s public sector–private sector line of defense, had done his homework:

PROXMIRE: “[Y]ou had an opportunity to be a forecaster with Greenspan & O’Neill [
sic
]. As you know, you put your forecasts to a direct test in the private sector.”

(The firm of “Greenspan O’Neil Associates” referred to a joint venture between Greenspan and C. Roderick “Rory” O’Neil that provided money management services to pension funds.) Proxmire next quoted a thenrecent issue of
Forbes
magazine:

PROXMIRE: “ ‘Greenspan & O’Neill turned in one of the least impressive records of all pension fund advisers.’ ”

Greenspan did not throw out an illusory defense this time:

GREENSPAN: “All I can say is, I acknowledge that that did not work very well, and I take my share of the responsibility.”

PROXMIRE: “I hope … when you get to the Federal Reserve Board everything will come up roses. You can’t always be wrong.”
GREENSPAN: “All I can suggest to you, Senator, is that the rest of my career has been somewhat more successful. [Laughter]”
⁹

Proxmire did not respond and let other senators question the candidate. Greenspan knew—if not on this day, then soon enough—that he could run out the clock with his own form of filibustering. Like a caterpillar that huddles into a ball when its back is touched, Greenspan would change a specific point into a vague assertion that would leave his questioner unsure of how to pry him open.

The other senators had their own concerns. Senator Jim Sasser (D-Tenn.), who was also chairman of the Senate Budget Committee, was concerned with debt accumulation. He thought the rising corporate debt associated with mergers and acquisitions was troubling, particularly the capacity of business to operate in the next downturn. Greenspan agreed. The United States would be more vulnerable in such a circumstance. Greenspan believed that fixed charges could be a problem, “specifically, debt service, which obviously does not decline when gross operating incomes fall, and the socalled ‘coverage’ of the interest becomes insufficient. … We are increasing debt at levels which should make us all uncomfortable. It certainly makes me uncomfortable.”
¹⁰
Greenspan apparently grew more comfortable. During the late housing boom, the Fed chairman gave many speeches extolling Americans’ rising wealth (house prices) while not addressing the fixed debt “which obviously does not decline” that home buyers acquired when buying those houses.

⁹
Dialogue between Greenspan and Proxmire about Greenspan’s record: Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, pp. 41–42.

The Leveraged Too-Big-to-Fail Megabank Foretold

Dismal as Greenspan’s forecasting record was, Proxmire seemed more concerned about another topic: the growing concentration in banking. Greenspan was testifying during the great deregulation of banking. Initiatives, other than those mentioned in previous chapters, included authorization for commercial banks to cross state lines, to enter the brokerage business, and to change themselves into conglomerates offering all of the above services and more. The pressure to grow also pushed from the other end—investment banks ran brokerages, brokerages became investment banks; and so on. And from the outside there were nonbank banks such as Sears.

Proxmire was concerned with Greenspan’s lobbying efforts. Among other ventures, a top project was Sears’s attempt to offer banking services. Proxmire addressed the candidate: “[Y]ou think, if you erected Chinese walls, you can still merge banking and commerce. And that shocks this Senator, and I think it should shock many others. You, in my judgment, favor an increased concentration of banking.”
¹¹

¹⁰
Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, pp. 36–37.
¹¹
Ibid., p. 60.

Proxmire had a second reason for concern. Prior to the nomination hearing, Greenspan submitted a statement to the White House and Congress, a full disclosure of relationships that might present conflicts of interest. In that statement, Greenspan did not disclose either Sears, Roebuck and Company or Lincoln Savings and Loan.
¹²
In the public record, there is an attachment to Greenspan’s disclosure, a “response to a query by Chairman Proxmire.”
¹³
Greenspan responded to Proxmire’s request for “information about certain client relationships.”
¹⁴
The attachment (a letter dated June 30, 1987, from Greenspan to Proxmire) distinguished Sears and Lincoln from the relationships listed in his full disclosure by slipping them in the side pocket of “advocacy projects.” He was paid by each to lobby for banking deregulation.
¹⁵

Proxmire reminded Greenspan that the Federal Reserve was acquiring greater control of the banking system: “[A]s Chairman of the Federal Reserve Board … you are the country’s leading bank regulator. The Fed, as we know, regulates a large number of State member banks … [and] the bank holding companies that control an increasing proportion of all the commercial banking in our country. You take over this position at a time when there’s a headlong drive toward increasing bank concentration.”
¹⁶

Proxmire tutored Greenspan on the menace of financial concentration: “As Chairman of the Federal Reserve Board you and your agency play the key role in approval or disapproval of these massive bank mergers… . I would feel much better about this appointment if there was somewhere in your record an indication of your awareness of the dangers to our economy of excessive financial concentration. Maybe you can reassure us that you understand that banking should be separated from commerce and the unique multiplicity of banking in this country is an immense source of strength for our small businesses.”
¹⁷
The candidate and director of J. P. Morgan and Company as well as its banking subsidiary, Morgan Guaranty Trust Company, was not Proxmire’s ideal central banker in this regard. Large banks are generally indifferent to small business.

¹²
Nathaniel C. Nash, “Greenspan Says He’d Sit Out Some Federal Reserve Votes,”
New York Times
, July 11, 1987.
¹³
Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 73.
¹⁴
Ibid., p. 78.
¹⁵
Ibid., pp. 78–79.

Proxmire knew what to expect from Greenspan. Proxmire described Greenspan elsewhere in the hearing as a “get along, go along, comfortable” CEA chairman.
¹⁸
Over the course of Greenspan’s term at the Fed, banks would merge and expand until they were no longer banks. They take deposits, make loans, trade for their own accounts, manage privateequity funds, manage hedge funds, serve as brokers for competing hedge funds, offer mortgages, securitize mortgages, sell securitized mortgages, then sell credit derivative swaps to protect the buyer against default from the securitized mortgages they previously sold. The chairman’s statements and questions were spoken to Greenspan, but may have been directed as much at members of the Senate Banking Committee. Proxmire saw danger ahead and found few kindred spirits among his fellow legislators. He resigned himself to a lonely outpost: “It seems to me that banking in this country and finance in this country is … likely to move very sharply … in the direction of concentration… . I think, most Senators, if they thought very long about it, might be very concerned about it. And I think the American people would be too.” (He also spoke as a man with little use for the Federal Reserve: “You will move in with a Board of clones—not clowns, clones.”)
¹⁹

Proxmire concluded: “[T]his nomination should result in a slambang debate in committee and on the floor. It won’t. And it is startling, in view of what you have told us.”
²⁰

Senator Proxmire did not run again for the Senate. His term expired in 1989. Later in 1989, the Federal Reserve permitted J. P. Morgan to underwrite Xerox debt, the first such issue from a commercial bank since 1933, the year of the Glass-Steagall Act. (That legislation had separated commercial from investment banking.) In what
Time
magazine called “the widest breach of Glass-Steagall yet,”
²¹
the Federal Reserve permitted J. P. Morgan to underwrite stock in 1990.
²²

¹⁸
Ibid., p. 4.

Today, Greenspan’s forbearance from regulating banks and derivatives is ascribed to his Ayn Rand–freemarket beliefs. Greenspan has no such beliefs. Senator Proxmire understood competitive banking. Competition was disappearing. After the Glass-Steagall Act was repealed in 1999, the largest banks devoured the minnows until the supermarketmegabanks were so large that they did not compete. The behemoths kept adding leverage. They deflected criticism (“we’re hedged”) until they grew so large, leveraged, and reckless that they were capable of devouring the world economy.

The Death of TownsendGreenspan

The TownsendGreenspan firm died quietly on July 31, 1987. The government asked Greenspan to remove his name from the firm, and he complied.
²³
The furniture and computers were sold at the beginning of August.
²⁴
Greenspan was required to place his $2.9 million of assets in a blind trust.
²⁵
The White House request was fortuitous. Pierre Rinfret, a New York consulting economist (who had served with Greenspan on Nixon’s 1968 economic advisory panel), refuted the common perception: “Everyone thinks that Greenspan gave up a lucrative consulting business to go to work in the public sector. In actuality, his business had been losing clients steadily to the point where he hardly had any left by the middle of the nineteen eighties.”
²⁶
The new Fed chairman had spent the past few years lobbying at 1600 Pennsylvania Avenue in lieu of studying livestock and mobile home sales. TownsendGreenspan had been hollowed out.

²¹
“American Notes: Banking,”
Time
, October 1, 1990.
²²
“History of J. P. Morgan Chase, 1799 to the Present”; www.jpmorgan,com/pages/
jpmorgan/investbk/about/history.
²³
“Greenspan’s Firm Is Closing,”
New York Times
, July 30, 1987, p. D5.
²⁴
Ibid.
²⁵
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.: Perseus, 2000), p. 156.
²⁶
Tuccille,
Alan Shrugged
, p. 154.

1987–2006

A permanent Governor of the Bank of England would be one of the greatest men in England. He would be a little ‘monarch’ in the City
. . . .
He would be the personal embodiment of the Bank of England; he would be constantly clothed with an almost indefinite
prestige
. . . .
Practical men would be apt to say that it was better than the Prime Ministership, for it would … have a greater jurisdiction over that which practical men would most value,—over money.

—Walter Bagehot,
Lombard Street
(1873)

On August 11, 1987, his hand placed on the Torah, the economist who had refused his bar mitzvah was sworn in as Federal Reserve chairman.
¹
Shortly after Greenspan revealed himself as a man who could keep a straight face no matter what he said.

Greenspan was tested immediately by the stock market crash on October 19, 1987. In retirement, Alan Greenspan would declare the 1987 stock market crash was a key educational experience during his tenure.
²
Among the lessons not learned was to distrust derivative sales pitches. The derivative product that set off this crash was excused by

¹
Justin Martin,
Greenspan
:
The Man behind Money
, (Cambridge, Mass.: Perseus, 2000), pp. 157–158. “Cousin Wesley brought along the copy of the Torah used at Greenspan’s CEA swearing in that was signed by Gerald Ford.”

²
Anthony Massucci, “Greenspan Cites 1987 Stock Crash, 9/11 as Key Education at Fed,”
Bloomberg
, June 1, 2007.

103 one of its inventors, Mark Rubinstein: “[A] day like this wouldn’t be expected to happen during the lifetime of the universe.”
³
We would hear other “once in the lifetime of the universe” excuses in 1994 (discussed in Chapter 10), 1998 (the topic of Chapter 15), and again in 2008. Each time, Greenspan followed by singing the virtues of derivatives. He seemed to be a slow learner.

The most charitable interpretation of Americans’ love affair with Greenspan would acknowledge people’s mental laxity. It is not too strong a description to say that many Americans worshipped Greenspan. At the very least, most Americans who listened to Greenspan took him at his word—even though they did not know what he was saying. This included the Washington politicians, Washington-oriented economists, and Wall Street strategists.

They were well served by Greenspan. All interests inflated. Expansion surrounded us: the stock market, stock-option payouts, Fannie Mae, the reputation of central banking, and the growing opportunities to become a CNBC celebrity. This contrasted with the deflation of the middle class and the industrial economy.