"Tomorrow is the 25th
anniversary of one Sir Alan Greenspan's confirmation vote. Fred, you doing
anything special to celebrate?" wrote Scott Frew, General Partner of
Rockingham Capital Partners L.P. hedge fund.
Well, no, but we have an obligation to
remember. What follows is a draft of was later refined in Panderer
to Power: The Untold Story of How
Alan Greenspan Enriched Wall Street and Left a Legacy of Recession and
in other publications. This includes comments of other senators that may not
have been published elsewhere. Reading through this early version, it is
notable how many senators were concerned the imbalances - federal budget
deficit, trade deficit, the leveraging of corporate balance sheets - were about
to crush the country. And here we are 25 years later.
Since I'm dragging out reruns, a frequently repeated warning:
"The sense of security more
frequently springs from habit than from conviction, and for this reason it
often subsists after such a change in the conditions as might have been
expected to suggest alarm. The lapse of time during which a given event
has not happened is, in this logic of habit, constantly alleged as a reason why
the event should never happen, even when the lapse of time is precisely the
added condition which makes the event imminent."
-George Eliot, Silas Marner
Now, to the hearing that preceded the Senate
confirmation vote on August 11, 1987:
Greenspan's nomination hearing before the Committee on
Banking, Housing and Urban Development took place on July 21, 1987. It was
chaired by Senator William Proxmire of Wisconsin. In Proxmire's opening
remarks, he churned out the requisite nonsense. He ticked off a pantheon of
chairmen - Martin, Burns and Volcker - then extolled their backbone: "If
there is one distinguishing hallmark of their service as chairman of the Fed it
was their consistent independence. They were independent of the President and
were independent of Congress." He then confirmed the legislators' support
for such independence by asking the question: "From the time you take over
this office you will be entreated to expand the nation's money supply.... Are
you the man who can say no to the Administration and to Congress?" (This
was in the early stages of Proxmire's remarks and no answer was expected, but
we can be sure, what was expected would have been pronounced, with neither the
candidate nor the interrogators believing a word of it. During the hearing,
Greenspan would quote from the textbook: "It is absolutely essential"
that the Fed's "central focus be on restraining inflation because, if that
fails, then we have very little opportunity for sustained, long-term
growth.")
Proxmire's exploration then grew more interesting. The
senator told Greenspan he had voted against the CEA chairman's nomination in
1974. Greenspan had proved himself to be a "get along, go along,
comfortable and increasingly popular chairman." (It is not clear if
Proxmire considered this good or bad.) The Banking Committee chairman chided
the candidate for a "dismal forecasting record" when he was chairman
of the CEA. Proxmire reviewed the forecasts made by the Council of Economic
Advisers between 1976 and 1986. The Senator was most interested in the CEA's
projections made during Greenspan's term looking forward to the years 1976,
1977 and 1978. In Proxmire's words, the forecasts made by the candidate were
"way off." Of the interest rate forecasts made by the Council of
Economic Advisers (for the years 1976 through 1978), Greenspan's were wrong by
the biggest margin of any of the 11 years..." Proxmire went on:
"There you broke all records for the entire period in error." The man
whose opinions President Ford weighed more heavily than "those of any
other economist" had prophesized the Treasury bill rate would be 4.4% in
1978. It was 9.8%.
Of inflation: "There again, you broke all
records." The only CEA chairman to adorn the front cover of Newsweek
estimated the Consumer Price Index would rise 4.5% in 1978. It soared 9.2%.
In later years, Greenspan would control such quibbles;
not this day. He replied to Proxmire: "That is not my recollection of the
way the forecasts went." Proxmire, forecasts in his hand, read the date to
Greenspan. The candidate admitted: "Well, if they're written down, those
are the numbers."
The transcript follows:
PROXMIRE: "Yes."
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 in later years. Proxmire waited patiently and
then responded:
PROXMIRE "Every 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. The firm
of "Greenspan & O'Neil" in the following discussion refers to a
joint venture between Greenspan and Rory O'Neil that provided money management
services to pension funds.
[Note:
Rory O'Neil recently died, on July 31, 2012. Reading the obituaries, he was an
accomplished investor and was a hard-working philanthropist, spending over 30
years restoring the dilapidated waterfront of Hartford, Connecticut. Of course,
the obituaries had to fall under such headlines as: "Former
Greenspan partner..." They spent less than one year together. Such are
vagaries of history. - FJS]
"You had the opportunity to be forecaster with
Greenspan & O'Neil. As you know, you put your forecasting to a direct test
in the private sector." Proxmire then quoted a recent issue of Forbes
Magazine. "'Greenspan & O'Neil turned in one of the least impressive
records of all pension fund advisers.' "
Greenspan did not throw out an illusory defense this
time: "All I can say is, I acknowledge that did not work out 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."
As a taste of what was to come, this was an
introduction to Greenspan's ever-present qualifiers: "suggest" and "somewhat"
giving the candidate room to maneuver, should Proxmire pursue this course of
interrogation. The Senator did.
Proxmire quoted a forecast Greenspan sent to clients
on March 20, 1987. "The recession we had not expected until 1990 now
appears more likely to emerge in the last quarter of 1989.... A stock-market
led expansion of capital equipment in late-1987 is projected to lead to a final
surge for the business credit cycle. This surge is expected to precipitate a
recession shortly thereafter... [And the] recession is also expected to be
somewhat more severe than we had projected in October [1986]."
Proxmire asked Greenspan if he still stood by that
forecast:
GREENSPAN: "May I ask you what the date on that
is?"
PROXMIRE: "The date is March 20, 1987. Four
months ago.
GREENSPAN: "I don't know how to answer
that..."
Since Proxmire prefaced his statement by stating the
date, Greenspan's question is strange. After not knowing how to answer that, he
then launched into an answer that was not an answer, but a response full of
qualifications that went on to qualify the qualifiers. Proxmire waited
patiently before responding: "You were so specific in the dates of this
forecast." To this, Greenspan went on to qualify more qualifications.
Proxmire, his time up, responded "yes".
The other senators had their own concerns, more general
in nature. Given the evolution of finance during Greenspan's term, his opinion
in 1987 is worth knowing. Senator Sasser from Tennessee was concerned with debt
accumulation. He thought rising corporate debt associated with mergers and
acquisitions was troubling, particularly the capacity of business to operate in
the next downturn. Greenspan agreed. The U.S. would be more vulnerable in the
event of a significant downturn. The fixed charges, "specifically, debt
service, which obviously does not decline when gross operating incomes fall,
and the so-called "coverage" of the interest becomes insufficient....
We are increasing debt at levels which should make us all uncomfortable. It
certainly makes me uncomfortable."
Greenspan spent his early tenure at the Fed shoveling
out the debris caused by companies that had taken on more debt than they could
bear. Greenspan's answer was qualified in the case of a "significant"
recession, which is more in line with 1975 than the early-1990s. Nevertheless,
companies were crippled. Knowing his worries in 1987, and what he lived
through, his later comfort with consumer fixed debt, particularly home
mortgages, is a repudiation of his own insight and experience.
Senator Riegle from Michigan was also concerned about
spiraling debt: "We are adding $1 billion of new debt every 2-1/2
days." Riegle lamented that the U.S. had been a creditor nation since 1914
but was now adding $170 billion a year to the trade deficit. There had been a
"breathtaking change" in dollar claims outstanding between 1982 and
1986.
Greenspan sounded equally distraught: "The
greater the external liability is denominated in dollars of the United States,
the greater the number of problems that occur when holders these dollars decide
to switch..." out of the dollar.
Senator Shelby from Alabama had the same concerns. He
asked Greenspan if he was troubled that, as a nation, "the U.S. had added
$1.5 trillion to the national debt over the previous five years when it took
the first 195 years to accumulate $1 trillion.
Greenspan responded: "It bothers me a great
deal." He then attempted to pacify the senator by stating: "We're
starting to deal with it." Shelby was having none of this: "We
haven't even started to deal with it." The nominee thought he might sooth
Shelby by claiming he did not think "it would be necessary to actually
reduce the national debt." Greenspan then launched into some
equivocations, that, if read five or ten times (not a luxury available to the
senators), essentially meant: "We can't reduce it because we won't reduce
it." This, of course, was true.
In an Abbot-and-Costello, "Who's-On-First?"
routine so common in later years, Shelby worried about America's status as the
largest debtor nation in the world. Greenspan replied, it "isn't
clear" if the U.S. is the largest debtor nation in the world.
SHELBY: "If we are not first, who is?"
GREENSPAN: "Oh, there are a lot of others."
End of discussion. Shelby did not have time to clarify
answers-and-questions for Jeopardy. The senators were allotted a given
amount of time to quiz the nominee. There may be a good reason for this
(filibustering politicians comes to mind), but, Greenspan knew - if not on this
day, soon enough - he could run out the clock with his own form of
filibustering. This often took the form of the Shelby discussion. Like a
caterpillar that huddles into a ball when its back is touched, Greenspan would
change a specific point of topic into a vague assertion that would leave his
questioner unable to pry him open.
Shelby warned the national debt was "a ticking
time bomb." He worried that the U.S. was vulnerable to foreign influence
on the dollar. He asked the nominee: since the Germans, French and several
others held an abundance of dollar claims, could they, in unison, decide to peg
the U.S. dollar at a specific rate convenient to their own policies?
The senators agreed some of their questions were too
involved for the candidate to answer on the spot. He was sent a list of
questions after the hearing to which he responded in writing.
One written question asked Greenspan if the Federal
Reserve could intervene in the foreign currency markets to set the price of the
dollar. He responded that the Federal Reserve should not intervene in currency
markets. It could, however, set the currency rate, but only for a short period
of time.
In another written response, Greenspan disavowed his
former advocacy of the gold standard. His reasoning was specious:
"Considering the huge amount of dollar claims in world markets, fixing the
price of gold [by central bank intervention] seems out of reach." It is
safe to assume he pulled this response out of a hat. He wanted to be Federal
Reserve chairman. The Committee wanted an assurance Greenspan was not one of
those dreaded gold bugs. Each side got what it wanted.
Proxmire closed the hearing, resigned to the result.
The senator had greater concerns than wayward forecasts. It is only conjecture,
but the transcript leaves the impression that Proxmire's real concern was the
integrity of the banking system. From his statements and questions, Proxmire obviously
thought the growing concentration of financial power and solvency of the
financial system was heading down a dark road. Given this, the purpose of his
interrogation of Greenspan may have been to prevent the fox from entering the
henhouse. Proxmire's concern might be summed up in this closing comment:
"It seems to me that banking in this country and finance in this country
is moving very sharply... in a direction of concentration and in a direction,
which, I think, most senators, if they thought about it very long, might very
concerned about." This leaves the sense of a man with a clear view of the
future, but who was frustrated with his myopic, fellow senators.
Given that Proxmire was correct, it is worth reviewing
his specific concerns, all of which bore fruit (or weeds). He was concerned
about non-banks encroachment on the banking industry. He thought Greenspan was
not the man to halt this tide. The candidate had been an "advocate"
for Sears. The consulting economist "wrote articles in support of and
allowing commercial and industrial firms to own banks." Proxmire expected
no resistance to whatever Greenspan proposed to the Federal Reserve Governors
or FOMC. ("[Y]ou will move in with a board of clones - not clowns -
clones.") The committee chairman regretted they had not discussed
Greenspan's position on direct investments by savings and loans associations,
"but many of us feel that direct investment can mean the downfall of an
industry..." This shows a surprising gap in the senator's preparation as
we shall soon see.
Proxmire resigned himself to the inevitable:
"[T]his nomination should result in a slam-bang debate in committee and
the floor. It won't, and it is startling, given what you have told us."
The senator's investigative reporting prodded the New
York Times to look past its archive of Greenspan superlatives and study his
forecasting record - for one day. The Times decided the Committee's
challenge to the Greenspan image was "only partly justified." It
found justification in a study by the Federal Reserve Bank of Boston in which
Townsend-Greenspan' and Wharton Economics' inflation predictions tied for last
place." (Wharton was the firm headed by Larry Klein, Nobel Prize winner in
1980 and inspiration for the Lawrence R. Klein Award
for Blue Chip Forecast Accuracy.)
In a reminder that the inflation of words was rising
at a rapid clip, the Times opened the article by reminding its readers:
"For more than 20 years, Alan Greenspan has figured prominently on all the
lists of famous American economic forecasters." Other than the occasional
prediction quoted by the Times', Greenspan was an unknown figure before
his CEA tour. His fame as a forecaster, if that is the right word, principally
rose because the status was asserted. (For example: in 1981, the Times
explained Murray Weidenbaum was at a disadvantage, since the new CEA chairman
lacked Greenspan's "expertise as a forecaster.")
Aspects of Greenspan's willowy character bloomed
during the summer of '87. In early June, he told a Chicago audience that
"over the long run" the value of the dollar would go
"significantly lower." A week later, at the press conference
announcing his nomination, he discussed "evidence" that the dollar's
fall had bottomed out." Before the Banking Committee, he announced the
dollar had entered a "period of stability."Given the approaching
stock market crash, which was inseparable from a plunging dollar, this last
prediction would seem to rival his 1973 advice to buy stocks. But this was not
his prediction at all; his own position was expressed to the Chicago audience
the month before. Proxmire was on his tail, but pursuing Greenspan's currency
conversion would be a useless exercise. Greenspan knew this; the senator knew
this. The candidate also knew the Federal Reserve chairman could survey the
political winds each morning and make the opportune forecast.
Townsend-Greenspan died quietly on July 31. The White House asked Greenspan to
remove his name from the firm. He complied. The furniture and computers were
sold at the beginning of August. Greenspan was required to place his $2.9
million of assets in trust.The White House request was fortuitous. Pierre
Rinfret, a New York consulting economist (who 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 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."[Note: for more recent comments, see: "Color
Commentary."] The new Fed chairman had spent the past few
years lobbying at 1600 Pennsylvania Avenue in lieu of studying livestock and
mobile home sales at 120 Wall Street (the firm's address). Townsend-Greenspan
had been hollowed out.
Prior to the hearing, Greenspan submitted a statement
to the White House and Congress, a full disclosure of relationships that might
cause conflicts of interest. The nominee listed his board membership at J.P.
Morgan and Company as well as its banking subsidiary Morgan Guaranty Trust
Company, his associations with Capital Cities/ABC Inc., General Foods
Corporation, Mobil Corporation, Pittston Company, Aluminum Company of America
and Automatic Data Processing Inc. Senator Proxmire questioned Greenspan on two
relationships Greenspan had not listed: Sears, Roebuck & Company and
Lincoln Savings & Loan of Irvine, California. Greenspan's distinguished the
two by slipping them in the side pocket of "advocacy projects."
Cutting through the euphemism, he was paid by each to lobby for banking
de-regulation. As Fed chairman, he would become the nation's banking regulator.
Greenspan's "advocacy" distinction was
furtive. At the time, he was lobbying for non-financial companies such as
automakers and retail chains to operate limited-service banks. His advocacy for
such was anathema to Proxmire, who was no fan of de-regulation. Greenspan also
wished to [eliminate] the Glass-Steagall Act. This 1933 bill prohibited
commercial banks from underwriting securities. The Glass-Steagall Act was
disappearing by slow erosion. (It was repealed in 1999.) An early victor was
J.P. Morgan & Company, the first commercial bank allowed to underwrite
corporate debt (in 1989) and common stock (in 1991). Greenspan's influence
should not be exaggerated. J.P. Morgan still possessed the aura of its
namesake. It was considered by many as an appendage to the U.S. Treasury.
[Note: It still is. - FJS, 2012] Its first past-the-post victory was a natural
step in the evolution of banking.
Greenspan was fortunate his nomination preceded the
unwinding of Lincoln Savings & Loan. The "Keating Five" scandal
was hatched at Lincoln. Five senators lost credibility in its wake
(specifically: Cranston, Riegle, De Concini, Glenn, and McCain).
Savings and loans had suffered whiplash from the rise
and fall of interest rates. Many were in danger of extinction. Alan Greenspan
had warned of their vulnerability. In 1981, he told U.S. News & World
Report that high interest rates were suffocating S&Ls: They "can
only exist in a non-inflationary environment." He told the Times "[t]here
are now a bunch of moribund cases out there." The consulting economist was
not sure if "any" of the savings and loans had equity, but that was
not the real problem: "The problem is cash flow...There are a number of
institutions that are barely able ... to pay their liability side [of the
balance sheet]."
His sweeping claim of insolvency was an exaggeration,
but there was much truth in what he said. Notably, his concerns did not apply
to Lincoln. It was run by the Crocker family, which owned 40% of the shares.
Like most S&Ls, it lost money in 1981 and 1982, but, as with many of these
institutions, returned to profitability in 1983 (with the decline of interest
rates). Donald Crocker, son of the founder, had dropped his law practice to
nurse Lincoln back to health. Having succeeded, he wanted to do something else.
Charles Keating offered to pay $51 million - two and a half times its
over-the-counter market price. Michael Milken helped broker Keating's
acquisition.
An economic consultant who would write a bill of good
health on the part of Lincoln should have looked upon Keating with some
curiosity. Since Alan Greenspan devoted his greatest energy to knowing everyone
who wielded the levers of power, it would have been a strange lapse if he was
singularly uninterested in his client. Keating had been executive vice
president of Carl Lindner's American Finance Corporation. Lindner's reputation
rose from the conglomerate boom of the 1960s. Lindner was an early and smart investor
in Milken's junk bond offerings. In 1979, the SEC charged Keating with making
improper loans to insiders and friends (of Lindner's Provident Bank of
Cincinnati). Keating had also arranged a pattern of loans to purchasers of
assets which Lindner wished to sell. Keating
consented to a permanent injunction
with the SEC, which should have barred him from
ownership of an insured depository. Somehow, his Lincoln Savings application to
the FHLB slipped down the drain hole.
William Seidman, who headed the Resolution Trust
Corporation, the body that cleaned up the savings and loan mess, wrote later
that Michael Milken had "rigged the market by operating a sort of daisy
chain among the S&Ls to trade the bonds back and forth across his famous
X-shaped trading desk in Los Angeles. By manipulating the market, he maintained
the façade that the bonds were trading at genuine market prices... [W]hen....
[Milken] was brought down, and his trading operation with him, so were the
S&Ls that depended on the value of his bonds to stay afloat."
In 1984, Alan Greenspan was hired by Charles Keating,
who needed a respected figure to write a letter to his regulator, the Federal
Home Loan Bank of San Francisco, stating that Lincoln Savings and Loan's
investments were sound.
On February 13, 1985, Alan Greenspan wrote a letter to
Thomas F. Sharkey, the Principal Supervisory Agent at the Federal Home Loan
Bank in San Francisco. Most of the letter addressed the direct investments of
Lincoln. (In the wake of hyper-activity, the Federal Home Loan Bank Board had
recently passed a new direct investment rule in an effort to corral overzealous
S&Ls.) He informed Sharkey that Lincoln had "adequate capitalization,
sound business plans, managerial expertise and proper diversification." Greenspan
stated that Lincoln's management "is seasoned and expert in selecting and
making direct investments." The seasoned, J.P. Morgan board member
revealed Lincoln "has developed a series of carefully planned, highly
promising, and widely diversified projects" and "that denial of the
permission Lincoln seeks would work a serious and unfair hardship on an
association that has, through its skill and expertise, transformed itself into
a financially strong institution that presents no foreseeable risk to the
Federal Savings and Loan Corporation."
By that time, Lincoln was not only loaded up with
deals through Milken, it was swapping them at a profit with its holding
company, American Continental Corporation.
American Continental Corporation - and Charles Keating
- had been spun out of Carl Lindner's American Financial Corporation.
In William Seidman's words: "The Greenspan report
failed to note that Keating's savings and loan had simply exchanged interest
rate risks for the much greater asset quality risks - that is, the
old-fashioned, hair-curling risk of speculative real estate investments."
While under Keating's employ, Greenspan also suffered a lapse when writing a
letter to Ed Gray. The man who would become the nation's leading bank regulator
in 1987 notified the FHLB chairman that deregulation was working as planned.
Greenspan cited 17 thrifts that had reported record profits and were prospering
under the new rules. By 1989, 15 of the 17 thrifts would be out of business and
cost the Federal Savings and Loan Insurance Corporation several billion
dollars."
Barrie Wigmore, then at Goldman, Sachs, wrote an
excellent book, Securities Markets in the 1980s. Wigmore discussed how
Meshulam Riklis, Carl Lindner, and Saul Steinberg used their conglomerate platforms
to swap paper.
Wigmore wrote, of Riklis, Lindner and Steinberg:
"[I]t is tempting to conclude they... represented a cabal.... [They]
cooperated and invested with each other extensively and were old hands in the
market aspect of "Chinese paper" from the merger wave of the
1960s." Their "activities illustrate the combination of native
cunning and access to leverage that made them effective."
Wigmore wrote they (Riklis, Lindner and Steinberg) had
a common involvement with Michael Milken's group at Drexel Burnham that
probably helped to create enough liquidity for their junk bond
securities..."
Greenspan surely knew who he was dealing with. He had
been on Wall Street in the 1960s. He trafficked in knowing who he should be
smoozing. In the 1980s, he must have known Lincoln was part of the Riklis,
Steinberg, Lindner, Milken crowd.
This was just the man to inherit the Federal Reserve
chairmanship in 1987. Four years before, in 1983, a poll of Wall Street
executives found that 31% of them had a special confidence in Alan Greenspan,
should he be named chairman. He was second in that poll, behind Paul Volcker.
What was it that Wall Street saw in this fourth-rate economic consultant?
Charles Keating was convicted of looting $3.4 billion. Alan Greenspan was not
held to account for his endorsement because the political establishment was in
no position to cross-examine him. When Keating was asked whether the money he
contributed to the Keating Five had influenced them, his response was
refreshingly honest: "I certainly hope so." In 1988, when the
hemorrhaging S&Ls had already cost several politicians their credibility,
333 Congressmen and 61 senators listed "significant donations from the industry."
Donald Regan, who was President Reagan's chief-of-staff from 1985 to 1987, had
been trying to oust Ed Gray from his position since 1984, (when Regan was
Treasury Secretary). Many of the S&Ls Gray shut (including San Marino
S&L) were large contributors to President Reagan's 1984 re-election
campaign; Donald Regan "believed in helping contributors to the
party." Gossip on Capital Hill had it that the former chairman of Merrill,
Lynch wanted to "destroy the S&Ls as privileged providers of housing
finance." True or not, the contributions of Merrill and like firms to the
housing mania two decades later were impressive.
The other body that might have investigated
Greenspan's involvement was the media. It made little ado about much. When it
did make ado, Greenspan turned the question on its head. This was to be the
mistletoe that hung over his 18-year affair with Congress. A quintessential
example of his enduring magic act was anteceded by a 1989 Times' article
with the title "Greenspan's Lincoln Savings Regret." The article was
poorly titled; the chairman expressed no regret. If Greenspan received the same
assignment in 1989 with the same evidence he had in 1984, "his conclusions
about Lincoln... would be very much the same."
Alan Greenspan cannot admit to a mistake. Like a
mother hen defending her offspring, Greenspan developed highly successful
defenses. Here, he takes a defiant stand; it puts an end to the interrogation.
He seemed to reserve this for instances when his actions were indefensible. (We
will see it again when Greenspan came under attack for a speech in 2004 that
urged the innumerate to buy adjustable-rate mortgages.) Note that when Senator
Proxmire pinned Greenspan to the mat, he could not make the simple admission:
"I was wrong." The Greeks developed this plot 2,500 years ago.
Greenspan will, as chairman, imitate art - his mistakes will compound and
inflate, inducing the most tortured logic, mutating the economy and financial
structure in ever greater distortions.
He told the Times reporter the issue was
whether the ownership by savings and loans associations in real estate projects
and other commercial ventures "posed excessive risks." This was not
the issue at all. The consulting economist had been hired by a man with a dubious
past and a regrettable present whose financial statements were filled with
fraudulent loans and junk bonds. Lincoln had more than doubled in size over the
past year when Greenspan reviewed its "application [for direct
investments] and its audited financial statements" (according to his
letter to Thomas F. Sharkey.) The financial statements showed depositors' money
had been invested in raw land in the Arizona desert and betrayed an
insatiable appetite for junk bonds. The erstwhile S&L had abandoned the
home mortgage market, Southern California or otherwise, despite its superb
mortgage record among large thrifts. Recall that Keating had agreed with the
Federal Home Loan Bank to concentrate his portfolio on Southern California home
mortgages. Surely, this thumbing-of-the-nose at the FHLB would have crossed
Greenspan's inspection if he more than glanced at Lincoln's books.
Again, by 1989, Greenspan was the country's top bank
regulator. And again, he had been a director of J.P. Morgan. He had been on the
board of directors of Trans-World Financial, a savings-and-loan holding company
from 1962 to 1974. At a 1998 FOMC meeting he would reminisce: "When I was
in the private sector, I remember looking at the details of particular loans
that were shown to bank directors. I was on the loan committee of [J.P.
Morgan], and we actually went through the loan portfolio major client by major
client. The banks' senior loan officers would provide a basic review. They
would take the loan portfolio and point to the vulnerabilities and strengths of
the borrowers and give their evaluations of the risks that were involved. The
review was quite thorough..." The audited, junk-bond portfolio placed
before the consulting economist may have been priced at par. But chances are,
they were Drexel Burnham issues. The 1984 annual report of Tom Spiegle's
Columbia Savings & Loan - one of the "big three" that held $3.5
billion of junk at the end of the same year - shows that every issue was sold
my Milken's group. By 1985, everyone had their suspicions about Drexel and
Milken.
The Times reporter told his readers that
"no one in Washington is saying that" the author of the essay
"Integrity" has "compromised his integrity or his office."
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