Tuesday, October 02, 2007

The Sub-Prime Summer V

Former Federal Reserve Chairman Alan Greenspan speaking in London today throws out some thoughts on the subprime mortgage mess in the financial markets, and appears to point his finger directly at the big rich companies, rather than the people with bad credit history and the firms loaning them money. H/T Dad29 (who isn’t convinced Greenspan is totally sane).

Greenspan defends subprime: "Subprime mortgages were and are risky, but they are worth it," Greenspan said, adding that is better to have a larger property owning class with a vested interest in the system. "I'm terribly concerned that we would cut back on the availability of subprime that has enabled a very significant increase in mortgages among minorities in the United States," he added.

Greenspan Sees `Rethinking' on CDOs: "The Wall Street firms were under real pressure to supply asset-backed securities, and the Wall Street firms were pressing the lenders to give them more raw material,'' Greenspan said today. "Credit standards just went straight down, and applications for subprime mortgages soared. The consequences of that are evident.''

Looking back over my thoughts about the financial turmoil beginning this February, I tend to agree with the former Chairman. Both the subprime market and mortgage backed securities (MBS) exist prior to the lending lunacy peaking in 2005. The driving force is not an unprecedented surge in people wanting money combined with a simultaneous altruistic impulse warming the cold hearts of underwriters. The impetus for relaxing lending standards is an increasing demand from Wall Street for high yield bonds. Bonds utilized in leveraged derivative structures to squeeze out pennies from the yield differences.

Wall Street demand causes the increasing supply of substandard lending and well intentioned Federal anti-discriminatory legislation allows lenders to abandon traditional underwriting and credit standards to meet this demand. In other words, if Wall Street yield v. yield gamesmanship doesn’t get out of hand, then Main Street lending practices don’t get perverted.

So, I blame corporate greed as the primary source of this problem, and because the problem is greed there is no need for political action to disrupt the cruelly efficient way the market place acts to correct excesses of this timeless temptation.