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01/07/2000

Greenspan

With the reappointment of Alan Greenspan as chairman of the
Federal Reserve, it only seemed right to spend a few paragraphs
reviewing some things about the man. Nothing bad. After all, he
is the father of the bull market, or so the ignorant would have you
believe.

Did you know what Greenspan and Bill Clinton have in
common? Alan originally wanted to be a professional musician
and he was a saxophone player, just like the President. As a
matter of fact, Greenspan attended New York''s prestigious
Juilliard School. He even had a stint in the Henry Jerome swing
band. For you Nixon trivia buffs, one of the other members of
that band was Leonard Garment, later a key aide to the Dickster.
Greenspan, however, didn''t see a big career in music so he ended
up in economic consulting.

In the 1960s, Greenspan made the following statement in a piece
which later found its way into one of Ayn Rand''s books. The
subject was gold.

"The financial policy of the welfare state requires that there be no
way for the owners of wealth to protect themselves. This is the
shabby secret of the welfare statists'' tirades against gold. Deficit
spending is simply a scheme for the hidden confiscation of wealth.
Gold stands in the way of this insidious process. It stands as a
protector of property rights."

So you see, old Alan has had a shinin'' for the precious metal for
quite some time. In a different vein, you would also have thought
that the fact that gold hasn''t done anything over the last 3+ years
would have told him something about inflation.

Greenspan later became head of Gerald Ford''s Council of
Economic Advisers. At this point he took up tennis and
developed into quite the player. Author, and bond expert, Martin
Fridson writes that Greenspan once commented on his tennis
play. "As economists are prone to do, I''ve been extrapolating,
and I''ve concluded that I''ll join the professional tennis tour at
104." Yes, Alan''s a veritable Shecky Greene.

In the early 1980s, Greenspan found himself involved in a rather
embarrassing matter, that of Charles Keating and the Lincoln
Savings & Loan. As we were to find out later, Lincoln wasn''t
your ordinary S&L. And somehow Greenspan found himself on
Keating''s payroll as Keating paid him $40,000 for 2 letters that
Alan wrote to California bank regulators, testifying that Lincoln
had "transformed itself into a financially strong institution that
presents no foreseeable risk to the government." Oops, sorry.
It seems that Lincoln did represent one heck of a risk to all of us
taxpayers. By the summer of ''89, Keating''s assets had soared to
$5.8 billion but only 2% were in home mortgages. The eventual
cost of closing Lincoln down was well over $1 billion.

*And of course there was the "Keating Five," U.S. senators
Cranston, McCain, Glenn, deConcini and Riegle, who constantly
intervened repeatedly to block regulatory actions against Keating.
Only Glenn and McCain escaped this fiasco basically unscathed
It is also interesting that as I write this, McCain (who I like) is
having a little trouble with another conflict of interest situation,
that being the issue of Paxson Broadcasting''s acquisition of a
Pittsburgh television station. McCain used his influence to force
the FCC to make a decision (though by all accounts he did
nothing improper). You''d just think he would have learned a
little lesson from his Keating days. But back to Alan.

In the early 80s, Greenspan was also a director of J.P. Morgan
where he was instrumental in penning an essay "Rethinking Glass
Steagall" which made a case for repeal of the existing banking
laws back in 1984. Nothing wrong here, I just bring it up for the
record. I mean, after all, who will profit most from the new
Financial Services Reform legislation? Robert Rubin. But I
digress.

So in 1987, the heroic Paul Volcker retired as Fed chairman and
was replaced by Greenspan. Volcker had been in the process of
raising rates, while the equity market continued to soar (someone
say 2000?!), and Greenspan obliged by hiking rates one more time
before the market crashed in October of that year. The day after
Black Monday, October 20th, Greenspan, and the Fed, flooded the
Street with money and the market recovered as liquidity was
restored when most needed. The Crash was an experience that
haunts him to this day.

As Fed chairman, Greenspan quickly became known for his own
special brand of Fedspeak. "If I seem unduly clear to you, you
must have misunderstood what I said."

Author John Rothchild likes to say that Greenspan''s testimony to
Congress and his incidental speeches are "scrutinized like a coded
message intercepted across enemy lines. What was he saying?
What was he Really saying? Did he mean it? Is this a trick? Will
there be a preemptive strike? Not even the Pope or a psychiatrist
in the paranoia ward has to choose words more carefully than the
Fed chairman does."

In 1994, the chairman caught investors off guard by raising
interest rates for the first time in 5 years. He saw the specter of
inflation on the horizon and he resolved to crush, nay obliterate,
it. The day was February 4th and the Dow Jones lost some 2.4%.
Over the course of 1994 and into February of ''95, the Fed
boosted rates some 2 +%. The yield on the 30-year Treasury
rose from 6.35 to 7.88%, making ''94 the worst year for bonds
since 1967.

In the long run this was probably a good thing because it wrung
out some incredible speculation that had emerged in the markets.
For this was the time of derivatives. But there were some giant
losers, including Orange County, California, which eventually
became the largest municipality in history to file for bankruptcy,
and David Askin, whose clients were (unfortunately) emasculated
to the tune of $600 million.

Over the course of 1994, the crisis in Mexico was unfolding. By
December it became apparent that some sort of bailout may be
necessary to stave off a total collapse of the Mexican economy.
Greenspan was persuaded to help Clinton and Rubin win
congressional support for the Mexican aid package, despite his
reservations on "moral hazard" grounds. [If Mexico is too big to
fail, then what about Bank of America or Citicorp? If they had
problems, why shouldn''t they be bailed out?] Alan''s lobbying on
Capitol Hill also raised concerns over the Fed''s independence.

On February 1st, 1995, Greenspan raised interest rates for the last
time. By February 23rd he was telling Congress that he saw no
need for further increases in rates and that, in fact, the Fed was
prepared to lower rates, if necessary, in order to prevent a
recession. The Dow climbed over 4000 that day for the first time
ever.

In November of ''94, Greenspan made a curious comment with
regards to risk. "The willingness to take risk is essential to the
growth of a free market economy.If all savers and their financial
intermediaries invested only in risk-free assets, the potential for
business growth would never be realized."

So then 2 years later, December, 1996, he says the following
which is now etched in lore. "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?" As John Rothchild said, it was as if
the chairman had torched Old Glory. To which I would add, if
we are supposed to take risk, whose ultimate responsibility is
this? The risk taker or the Fed? But really, you can''t argue the
success of the past decade. What you can argue about is who
deserves the credit. Economist Larry Kudlow likes to say its the
entrepreneurial spirit of Americans that is most responsible. No
argument here. But regardless of who is most worthy, just don''t
give all of the credit to Alan Greenspan.

Sources: "It Was a Very Good Year," by Martin Fridson
"Money, Greed, and Risk," by Charles Morris
"Wall Street / A History," by Charles Geisst
"The Bear Book," by John Rothchild
"Devil Take the Hindmost," by Edward Chancellor

Brian Trumbore




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-01/07/2000-      
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Wall Street History

01/07/2000

Greenspan

With the reappointment of Alan Greenspan as chairman of the
Federal Reserve, it only seemed right to spend a few paragraphs
reviewing some things about the man. Nothing bad. After all, he
is the father of the bull market, or so the ignorant would have you
believe.

Did you know what Greenspan and Bill Clinton have in
common? Alan originally wanted to be a professional musician
and he was a saxophone player, just like the President. As a
matter of fact, Greenspan attended New York''s prestigious
Juilliard School. He even had a stint in the Henry Jerome swing
band. For you Nixon trivia buffs, one of the other members of
that band was Leonard Garment, later a key aide to the Dickster.
Greenspan, however, didn''t see a big career in music so he ended
up in economic consulting.

In the 1960s, Greenspan made the following statement in a piece
which later found its way into one of Ayn Rand''s books. The
subject was gold.

"The financial policy of the welfare state requires that there be no
way for the owners of wealth to protect themselves. This is the
shabby secret of the welfare statists'' tirades against gold. Deficit
spending is simply a scheme for the hidden confiscation of wealth.
Gold stands in the way of this insidious process. It stands as a
protector of property rights."

So you see, old Alan has had a shinin'' for the precious metal for
quite some time. In a different vein, you would also have thought
that the fact that gold hasn''t done anything over the last 3+ years
would have told him something about inflation.

Greenspan later became head of Gerald Ford''s Council of
Economic Advisers. At this point he took up tennis and
developed into quite the player. Author, and bond expert, Martin
Fridson writes that Greenspan once commented on his tennis
play. "As economists are prone to do, I''ve been extrapolating,
and I''ve concluded that I''ll join the professional tennis tour at
104." Yes, Alan''s a veritable Shecky Greene.

In the early 1980s, Greenspan found himself involved in a rather
embarrassing matter, that of Charles Keating and the Lincoln
Savings & Loan. As we were to find out later, Lincoln wasn''t
your ordinary S&L. And somehow Greenspan found himself on
Keating''s payroll as Keating paid him $40,000 for 2 letters that
Alan wrote to California bank regulators, testifying that Lincoln
had "transformed itself into a financially strong institution that
presents no foreseeable risk to the government." Oops, sorry.
It seems that Lincoln did represent one heck of a risk to all of us
taxpayers. By the summer of ''89, Keating''s assets had soared to
$5.8 billion but only 2% were in home mortgages. The eventual
cost of closing Lincoln down was well over $1 billion.

*And of course there was the "Keating Five," U.S. senators
Cranston, McCain, Glenn, deConcini and Riegle, who constantly
intervened repeatedly to block regulatory actions against Keating.
Only Glenn and McCain escaped this fiasco basically unscathed
It is also interesting that as I write this, McCain (who I like) is
having a little trouble with another conflict of interest situation,
that being the issue of Paxson Broadcasting''s acquisition of a
Pittsburgh television station. McCain used his influence to force
the FCC to make a decision (though by all accounts he did
nothing improper). You''d just think he would have learned a
little lesson from his Keating days. But back to Alan.

In the early 80s, Greenspan was also a director of J.P. Morgan
where he was instrumental in penning an essay "Rethinking Glass
Steagall" which made a case for repeal of the existing banking
laws back in 1984. Nothing wrong here, I just bring it up for the
record. I mean, after all, who will profit most from the new
Financial Services Reform legislation? Robert Rubin. But I
digress.

So in 1987, the heroic Paul Volcker retired as Fed chairman and
was replaced by Greenspan. Volcker had been in the process of
raising rates, while the equity market continued to soar (someone
say 2000?!), and Greenspan obliged by hiking rates one more time
before the market crashed in October of that year. The day after
Black Monday, October 20th, Greenspan, and the Fed, flooded the
Street with money and the market recovered as liquidity was
restored when most needed. The Crash was an experience that
haunts him to this day.

As Fed chairman, Greenspan quickly became known for his own
special brand of Fedspeak. "If I seem unduly clear to you, you
must have misunderstood what I said."

Author John Rothchild likes to say that Greenspan''s testimony to
Congress and his incidental speeches are "scrutinized like a coded
message intercepted across enemy lines. What was he saying?
What was he Really saying? Did he mean it? Is this a trick? Will
there be a preemptive strike? Not even the Pope or a psychiatrist
in the paranoia ward has to choose words more carefully than the
Fed chairman does."

In 1994, the chairman caught investors off guard by raising
interest rates for the first time in 5 years. He saw the specter of
inflation on the horizon and he resolved to crush, nay obliterate,
it. The day was February 4th and the Dow Jones lost some 2.4%.
Over the course of 1994 and into February of ''95, the Fed
boosted rates some 2 +%. The yield on the 30-year Treasury
rose from 6.35 to 7.88%, making ''94 the worst year for bonds
since 1967.

In the long run this was probably a good thing because it wrung
out some incredible speculation that had emerged in the markets.
For this was the time of derivatives. But there were some giant
losers, including Orange County, California, which eventually
became the largest municipality in history to file for bankruptcy,
and David Askin, whose clients were (unfortunately) emasculated
to the tune of $600 million.

Over the course of 1994, the crisis in Mexico was unfolding. By
December it became apparent that some sort of bailout may be
necessary to stave off a total collapse of the Mexican economy.
Greenspan was persuaded to help Clinton and Rubin win
congressional support for the Mexican aid package, despite his
reservations on "moral hazard" grounds. [If Mexico is too big to
fail, then what about Bank of America or Citicorp? If they had
problems, why shouldn''t they be bailed out?] Alan''s lobbying on
Capitol Hill also raised concerns over the Fed''s independence.

On February 1st, 1995, Greenspan raised interest rates for the last
time. By February 23rd he was telling Congress that he saw no
need for further increases in rates and that, in fact, the Fed was
prepared to lower rates, if necessary, in order to prevent a
recession. The Dow climbed over 4000 that day for the first time
ever.

In November of ''94, Greenspan made a curious comment with
regards to risk. "The willingness to take risk is essential to the
growth of a free market economy.If all savers and their financial
intermediaries invested only in risk-free assets, the potential for
business growth would never be realized."

So then 2 years later, December, 1996, he says the following
which is now etched in lore. "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?" As John Rothchild said, it was as if
the chairman had torched Old Glory. To which I would add, if
we are supposed to take risk, whose ultimate responsibility is
this? The risk taker or the Fed? But really, you can''t argue the
success of the past decade. What you can argue about is who
deserves the credit. Economist Larry Kudlow likes to say its the
entrepreneurial spirit of Americans that is most responsible. No
argument here. But regardless of who is most worthy, just don''t
give all of the credit to Alan Greenspan.

Sources: "It Was a Very Good Year," by Martin Fridson
"Money, Greed, and Risk," by Charles Morris
"Wall Street / A History," by Charles Geisst
"The Bear Book," by John Rothchild
"Devil Take the Hindmost," by Edward Chancellor

Brian Trumbore