22 Ibid., p. 286.
23 Seidman, Full Faith and Credit, p. 226.
24Ibid., p. 236. An example of how the daisy chain worked: Drexel put Keating into Playtex stock which Lincoln bought for $420,000. Lincoln sold the shares to American Continental Corporation, Keating’s holding company, for $2.1 million. Lincoln booked the $1.7 million profit. ACC sold most of the shares to Centrust Savings Bank of Miani for $12.47 million. ACC booked a $10.37 million profit. Source: Mayer, Greatest-Ever Bank Robbery, p. 175.
25 Nathaniel C. Nash, “Greenspan’s Lincoln Savings Regret,” New York Times, November 20, 1989.
Savings and loans that had “exploited California’s liberal thrift industry regulations” were profiled on the front page of the Times’s business section on November 15, 1984. Alan Greenspan’s hometown newspaper reported that “Columbia Savings and Loan Association of Beverly Hills nearly quintupled in size” to $4.9 billion over the past two years.27 The Times referred to a Forbes magazine article that explained Columbia’s growth was aided by ties to a “confederation of fast-stepping financiers, such as Carl Lindner [and] Saul Steinberg, who buy and sell low-grade commercial paper through the head of Drexel Burnham’s Beverly Hills office, Michael Milken.”28
The savings and loan industry was not yet “the worst public scandal in American history,” as Martin Mayer wrote in 1990.29 But, catastrophes were already piling up. Not too far from Lincoln’s headquarters in Irvine, California, San Marino Savings and Loan Association of San Marino, had grown from $23.9 million in 1980 to $841 million in 1984 by compounding collusive real estate partnerships.30 In February 1984, it was seized by the government.
This brings us up to December 1984. Alan Greenspan wrote his letter in support of Lincoln in February 1985.
Greenspan’s Letter on Behalf of Charles Keating
Seidman discovered that “Keating’s highly paid law firms, accounting firms, and appraisers were also very much a part of what turned out to be a huge fraudulent operation.”31 In 1984, Keating hired the four largest law firms in New York. Arthur Liman (of the law firm Paul, Weiss, Rifkind, Wharton & Garrison) recommended that Keating hire Alan Greenspan to write a bill of good health. Martin Mayer wrote that Greenspan was “then a private consultant heading a not very successful firm.”32 In his 1969 book, New Breed on Wall Street, Mayer wrote that Greenspan specialized in “statistical espionage.” Mayer later wrote: “the book on him in that capacity was that you could order the opinion you needed.”33 Whether Greenspan was catering to his clients or was simply obtuse is not known.
26 Wigmore, Securities Markets in the 1980s, p. 360.
27 Thomas C. Hayes, “New Curbs on Industry Under Study,” New York Times, November
15, 1984, p. D1.
28 Ibid.
29 Mayer, Greatest-Ever Bank Robbery, p. 1.
30 Ibid., p. 127.
31 Seidman, Full Faith and Credit, p. 233.
On February 13, 1985, Greenspan wrote a letter to Thomas F. Sharkey, the principal supervisory agent at the Federal Home Loan Bank of San Francisco. Most of the letter addressed the direct investments of Lincoln. Greenspan 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.” Greenspan’s report also stated that 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.”34
In William Seidman’s words: “The Greenspan report failed to note that Keating’s savings and loan had simply exchanged interest rate risks for much greater asset quality risks—that is, the old-fashioned, haircurling risk of speculative real estate investments.”35 While in Keating’s employ, Greenspan also suffered a lapse when writing a letter to Edwin Gray, the Federal Home Loan Bank chairman. Greenspan, the man who would become the nation’s leading bank regulator in 1987, notified Gray 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 those 17 thrifts would be out of business and would cost the Federal Savings and Loan Insurance Corporation several billion dollars.36 The television show Frontline reported that Keating paid Greenspan $40,000.37
32 Mayer, Greatest-Ever Bank Robbery, p. 140.
33 Ibid.
34 Ibid., p. 326, Appendix C: “The Greenspan Letter.”
35 Seidman, Full Faith and Credit, p. 232
It cost the government (so, the taxpayers) at least $2.0 billion to clean up Lincon Savings and Loan.38 Yet Alan Greenspan was not held to account for his previous endorsement. 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.”39 In 1988, when the hemorrhaging S&Ls had already cost several politicians their credibility, 333 House members and 61 senators listed “significant donations from the industry.”40 Donald Regan, who was President Reagan’s chief of staff from 1985 to 1987, had been trying to oust Ed Gray from his position (as chairman of the Federal Home Loan Bank Board) since 1984, when Regan was treasury secretary. One reason for this may have been that many of the S&Ls that Gray shut were large contributors to President Reagan’s 1984 reelection campaign. Donald Regan “believed in helping contributors to the party.”41
Looking Back in 1989: Greenspan Had No Regrets
The media did not enlighten the public. Greenspan evaded the New York Times in its interrogation. The 1989 article, “Greenspan’s Lincoln Savings Regret,” was poorly titled. The chairman expressed no regret. If Greenspan had received the same assignment in 1989 with the same evidence he had in 1984, “his conclusions about Lincoln … would be very much the same.”42
36 Stephen Pizzo, Mary Fricker, and Paul Muolo, Inside Job: The Looting of America’s Savings and Loans (New York: McGraw-Hill, 1989), p. 266; “Greenspan wrote the letter while he was paid consultant for Lincoln Savings and Loan of Irvine, California, owned by a Charles Keating, Jr., company.”
37 Mayer, Greatest-Ever Bank Robbery, p. 140.
38 www.fdic.gov/bank/historical/s&l/.
39 Margaret Carlson: Interview with Charles Keating, “Money Talks,” Time, April 9, 1990.
40 Mary Fricker and Steve Pizzo, “The S. & L. Scandal: The Gang’s All Here,” New York Times, July 27, 1990.
41 Mayer, Greatest-Ever Bank Robbery, p. 139.
42 Nathaniel C. Nash, “Greenspan’s Lincoln Savings Regret,” New York Times, November 20, 1989.
Alan Greenspan loathed to admit a mistake. Like a mother hen defending her offspring, Greenspan had developed highly successful defenses. In this case, he took a defiant stand, and it put an end to the interrogation. He seemed to reserve such defiance for instances when his actions were indefensible.
Greenspan told the New York Times reporter in 1989 that the issue “was whether the ownership by savings and loan associations in real estate projects and other commercial ventures posed excessive risk.”43 These are topics that Greenspan addressed to Edwin Gray. They are general subjects, not the specific issues of a bank balance sheet filled with risky loans and junk bonds. Greenspan reviewed its “application [for direct investments] and its audited financial statements” (according to his letter to Thomas F. Sharkey).44 By the end of 1984, Lincoln’s investments included raw land in the boondocks even as it betrayed an insatiable appetite for junk bonds.45
Such carelessness is important, given the fact that by 1989, Greenspan was the country’s leading bank regulator. He had had considerable relevant experience when he was hired by Charles Keating. Greenspan was a director of J. P. Mor
gan. He had been on the board of directors of Trans-World Financial, a savings and loan holding company, from 1962 to 1974.46 Moreover, Greenspan would later reminisce about his assiduous grounding in analyzing bank loans: “When … I was on the loan committee of [J. P. Morgan], … we actually went through the loan portfolio major client … by major client. The review was quite thorough.”47
Chances are, the Lincoln junkbond portfolio that Greenspan presumably reviewed was full of Drexel Burnham issues. The 1984 annual report of Columbia Savings and 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 by Milken’s group.48
43 Ibid.
44 Mayer, Greatest-Ever Bank Robbery, p. 325.
45 Nash, “Greenspan’s Lincoln Savings Regret.”
46 Greenspan’s “Statement for Completion by Presidential Nominees” under “Qualifications.”
47 FOMC transcript, September 29, 1998, p. 106.
48 Wigmore, Securities Markets in the 1980s, p. 286.
The New York Times reporter also told his readers in 1989 that “no one in Washington is saying that Mr. Greenspan has compromised either his integrity or that of his office.” Probably so. But the question is whether there was anyone left in Washington who dared raise the issue of integrity.
In the end, Greenspan compromised something. Maybe it was his obligation or ability to think. The evidence from Ayn Rand to the present was of a mind detached from its surroundings and unburdened by intellectual curiosity. He would soon be Federal Reserve chairman.
8
“The New Mr. Dollar”: Chairman of the Federal Reserve
1987
SENATOR PROXMIRE: “Every one of the other 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.”
ALAN GREENSPAN: “I feel sorry for me and happy for them.”1—Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987
Paul Volcker decided not to seek a third term in 1987. If President Reagan had pressed him to stay on, Volcker might have relented, but the Federal Reserve chairman did not receive enthusiastic support.2
Volcker’s purported independence from political considerations had been diluted. By the fall of 1986, Reagan had replaced all voting Fed governors. Previous appointees had resigned or their terms had expired.3
1 Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 42.
2In 1987, “[t]he Administration wanted a Fed chairman who would … collaborate more intimately with the White House.” William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon and Schuster, 1987), p. 713.
3 Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 4.
95
The Wall Street Journal wrote that this would “put a supply-side stamp on the central bank … [and] may enhance the chances for easier credit.”4 The supply-side movement had developed, politically, with similarities to the New Economics policy makers of the 1950s and 1960s. The supply-siders seamlessly wrapped expansive tendencies inside a pro-growth American flag. As in the 1950s, the mandate for growth swamped considerations that a closer relationship between credit and production was needed to approach a more balanced economy.
When Greenspan learned of his nomination to head the Fed, “he struggled inwardly to control his glee.”5 His biographer Jerome Tuccille writes: “This was the role he had been training for his entire life.”6
When the nomination was announced, Greenspan’s face was on the front cover of Time, with the caption “The New Mr. Dollar.”7 This was prophetic—both the omnipresent Greenspan image and the man who printed more dollars than all of his predecessors combined. Opinions in the Time profile varied. Robert Hormats, vice chairman of Goldman Sachs (International), predicted a sharp reversal in the new chairman’s ability to communicate: Volcker’s “banker’s jargon” was difficult to understand; Greenspan had “a gift for rendering economic concepts in … uncomplicated language.”8 This raises the question of how well Wall Street knew Greenspan in 1983, when 37 percent had expressed special confidence in him as Volcker’s heir.
The Nomination Hearing: Proxmire’s Quest for an Independent Fed
Greenspan’s nomination hearing before the Committee on Banking, Housing and Urban Affairs took place on July 21, 1987. It was chaired by Senator William Proxmire, a Democrat from Wisconsin. The senator told the candidate that he had voted against Greenspan’s nomination for chairman of the Council of Economic Advisers in 1974. Proxmire chided the candidate for a “dismal forecasting record” when Greenspan was chairman of the CEA. The senator reviewed the forecasts made by the CEA between 1976 and 1986. Proxmire was most interested in the CEA’s forward-looking projections for the years after Greenspan’s tenure. In Proxmire’s words, the forecasts made by the candidate were “way off.” Of the Treasury bill interest-rate forecasts made by the Council of Economic Advisers (for the years 1976 through 1986), Greenspan’s “were wrong by the biggest margin of any in the 11 years.” (The senator is referring to all of the CEA chairmen who served during the 11 years.) Proxmire went on: “There you broke all records for the entire period in error.” Moreover, the man whose opinions President Ford weighed more heavily than “those of any other economist” had prophesied the Treasury bill rate would be 4.4 percent in 1978. It was 9.8 percent.
4 Paul Blustein, “Fed Governor Emmett Rice Resigns Position,” Wall Street Journal, October 3, 1986.
5 Jerome Tuccille, Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker (Hoboken, N.J.: Wiley, 2002), p.163.
6 Ibid.
7 George Russell, “The New Mr. Dollar,” Time, June 15, 1987.
8 Ibid.
Of inflation: “[T]here again, you broke all records.” The only CEA chairman to adorn the front cover of Newsweek estimated that the Consumer Price Index would rise 4.5 percent in 1978. Instead, it soared 9.2 percent.
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.
Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession Page 11