Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession
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54 Greg Ip, “His Legacy Tarnished, Greenspan Goes on Defensive,” Wall Street Journal, April 8, 2008, p. 1.
55 Ibid.
56“Greenspan’s Senate Antagonist Attacks His Defense,” Blogs.wsj.com, April 9, 2008.
57Caroline Baum, “Volcker Stands Tall, Greenspan Keeps Shrinking,” Bloomberg, April 9, 2008.
58 Ibid.
28
Greenspan’s Hometown
2008
[O]ver-confidence finds exuberant expression in a bull stock market.… Once stock prices reach the point at which it is hard to value them by any logical methodology, [Greenspan] warns, stocks will be bought, as they were in the late-1920’s—not for investment but to be unloaded at a still higher price. The ensuing break could be disastrous. Panic psychology, Greenspan believes, cannot be summarily altered or reversed by easy money policies or any built in stabilizers.1
—Fortune magazine, March 1959
What Alan Greenspan really believed is beyond the scope of this book. We know what he said in public. Quoting him again, from earlier chapters, offers a synopsis of where we have traveled during his lifetime.
There are two categories in which his statements on investment can be channeled. The first is bubbles. The second is the need for longterm investment in a sustainable economy.
Of the first, bubbles, he stated what everyone at the local Rotary Club luncheon knows: “I think the downside risks are basically coming from the possibility of significant increases in stock and bond prices.… Ironically, the real danger is that things may get too good. When things get too good, human beings behave awfully.”2 At a different time:
1 Gilbert Burck, Fortune, “A New Kind of Stock Market,” March 1959, p. 201. 2 FOMC Meeting transcript, March 28, 1995, p. 42.
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“Mr. Greenspan declared that a rising stock market tended to put strong upward pressure on stockholder inclination to spend. If market values rise, and do not quickly fade again, he said, the gain gets built into the individual stockholder’s permanent assets and his standard of living ideas change, with consumption rising accordingly.”3
At the intersection of bubbles and investment, Greenspan explained “that a break in stock market trends was not just a harbinger of boom or recession, as is commonly held, but a crucial factor in causing a boom or a recession.”4 The larger the boom the larger the bust: these are not the words of Alan Greenspan, but at the time the New Economics (circa 1960) toyed with the idea that it had discovered how to cure the business cycle (there would be no more recessions), Greenspan “questioned the theory that the enlargement of the Government’s role in the national economy had brought a ‘new era’ in which an old-fashioned financial contraction was impossible.”5
This merges with the second category of Greenspan’s statements on investment, more important than the first. The first—bubbles—come about because the second operates poorly. Greenspan explained that longterm investment “is needed each year just to replace this depreciated capital stock, and more investment yet is needed to increase the nation’s net capital stock.” He stated the consequence of only investing for the short-term: “What happens if you have inadequate capital investment, is you wind up with lower standards of living than you otherwise would.”6
That is, lower standards of living for the majority. An earlier Federal Reserve chairman, William McChesney Martin, had explained to the Senate in 1957 the importance of asset inflation—monitoring the inflation of goods and services was not enough. He told the legislators that “if further inflation is expected, speculative commitments are encouraged and the pattern of investment and other spending—the decisions on what kinds of things to buy—will change in a way that threatens balanced growth.”7 Alan Greenspan expanded on this explanation in 1959 when he spoke to Fortune reporter Gilbert Bruck. In Bruck’s words, Greenspan explained that before the Federal Reserve was established “prices could not get too far out of line with real values because the supply of credit was automatically constricted by a limited money supply.” Since 1914, “[w]ith one eye necessarily cocked on politics, the Fed has always maintained a more than adequate money supply even when speculative booms threaten.”8 (This was really what Martin was telling the senators in 1957: stop putting pressure on the Fed to inflate.)
3 New York Times, “Economists Sift Jobs and Stocks,” December 28, 1959, p. 39.
4 Ibid.
5 Ibid.
6 Steven Greenhouse, New York Times, “Pitfalls in the Capital Spending Boom,” June 3, 1984.
7 William McChesney Martin, Statement before the Committee on Finance, U.S. Senate, August 13, 1957, p. 14.
It was about that time when James Joseph Ling was forming his conglomerate (see Chapter 3). His was a speculative venture of spectacular proportions. Federal Reserve or no Federal Reserve, there always were and always will be speculative manias. But it was the size of the conglomerate craze in the 1960s (when Saul Steinberg’s Leasco stock appreciated 5,410 percent) that acted as a destructive force on the economy.9 Such destruction was allied to excessive money printing by the Fed. This was also true when LBOs battered companies in the late 1980s and of private equity most recently.
In the same 1957 speech to the Senate, Martin worried that the heaviest burden would be borne by those who could not protect the value of their income or savings.10 That is the “little man.” Martin predicted those with “savings in their old age would tend to be the slick and clever rather than the hardworking and thrifty.”11
The lower standards of living for the majority today are partly attributable to the lack of longterm investment, the need for which Alan Greenspan explained above. Instead, we have tended more and more to the opposite: short-term investment by financiers with (what seems) limitless access to borrowed money that is loaded onto company balance sheets. (Alan Greenspan worried about this in the 1980s: “We are increasing debt at levels which should make us all uncomfortable. It certainly makes me uncomfortable.”12
8 Gilbert Burck, Fortune, “A New kind of Stock Market,” March 1959, p. 201. Greenspan continued, again, in the words of Gilbert Burck: “The Fed, furthermore, has recently been boxed in by a huge and partially monetized federal debt, which tends to produce an addition to the money supply, whose size is unrelated to the needs of private business.”
9 John Brooks, The Go-Go Years (New York: Weybright and Talley, 1973), p 238. 10 Martin, Statement Before the Committee on Finance, p. 15-16.
11 Ibid, p. 23.
Wealth has risen to the top as most Americans work under the weight of unsound business structures: downsizing and all the rest of the burdens borne by those who are toiling in a haze of uncertainty.
greenspan’s history lesson
In his 1966 essay “Gold and Economic Freedom,” Greenspan dramatized (maybe overdramatized) an earlier period when the Federal Reserve paid little attention to asset prices: “When business in the United States underwent a mild contraction in 1927, the Federal Reserve created [excessive] paper reserves.… The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom.… As a result, the American economy collapsed.… The world economies plunged into the Great Depression of the 1930’s.”
Money pouring into speculation in the 1920s went not only into the stock market, it also went into an asset class that probably received more speculative funds than the stock market: real estate. Speculative real estate lending then bore a sickening resemblance to the present. But by the late 1920s, New York banks lent to commercial builders long after they should have stopped. The city’s office space rose 92 percent in the last half of the 1920s and by another 56 percent after the stock market crash.13
One notable growth story was the Bank of United States. Its asset base grew from $46 million in 1923 to $315 million in 1929.14 It failed in 1930. Among other problems, it had caught the skyscraper bug. It financed two monuments designed by the esteemed architect Emory Roth: the San Remo and Beresf
ord apartment houses. The builders were soon in bankruptcy. The San Remo and Beresford became instantly fashionable, yet they sold at a deep discount in 1940.15 To this day, they are two of the most distinguished silhouettes on Central Park West. Vikram Pandit, the current CEO of Citigroup, paid $18 million for a 10-room apartment in the Beresford.16 The San Remo is home to Steven Spielberg, Steve Martin, and Bono.17
12 Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, pp. 36–37.
13 Robert A. Stern, Gregory Gilmartin, and Thomas Mellins, New York 1930: Architecture and Urbanism between the Two World Wars (New York: Rizzoli, 1994).
14 James Grant, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken (New York: Farrar Straus Giroux, 1992), p. 203.
A critique of the 1932 skyline published in the New Republic indicates the destructive capacity of an unstable banking system: “[W]inter evenings were cruelly revealing, for when the sun set before the close of daily business it was all too apparent how many of these towers stood ‘black and untenanted against the stars.… With some few exceptions, the newest New York may be described as a sixty-story city unoccupied above the twentieth floor.’”18
Alan Greenspan’s Hometown
New York is at the pinnacle of America’s financial economy. When Alan Greenspan entered New York University, New York was an industrial center. When he joined William Townsend, it was a headquarters town, the center for marketing and selling. In 1960, developer William Zeckendorf understood how New York had changed: “Precisely because New York is a national headquarters, it is also a middle-income as well as high-income town.”19 To Zeckendorf, New York was “an unparalleled consumer’s market.”20
15 “Two Block Fronts Sold on West Side,” New York Times, July 14, 1940. The original investment for land and building was $16,500,000. The sale price is ambiguous in this article; it looks as if it was between $7.4 million and $9.8 million.
16 Sharon L. Crenson, “Pandit Buys Tony Randall’s Co-op for $17.9 Million,” Bloomberg, September 26, 2007.
17 Allen Salkin, “Among the Rich and Famous . . .,” New York Times, May 15, 2007.
18 Elmer Davis, New Republic, 1932, quoted in Stern, Gilmartin, and Mellins, New York 1930, p. 603.
19 Robert A. M. Stern, Thomas Mellins, and David Fishman, New York 1960: Architecture and Urbanism between the Second World War and the Bicentennial (New York: Monacelli Press, 1995), p. 29.
The United States was consuming more than it was making. This imbalance needed to be financed. Alan Greenspan worked in the city that produced the finance. Greenspan profited. By the late 1960s, he was a millionaire and lived in a fashionable New York apartment house.
Alan Greenspan was born for the times. The excesses required a spokesman who could talk nonsense with a straight face. He could tell Americans that they were rich when they were really poor. Americans believed him and kept spending. Greenspan was awarded a doctrine after he adopted Friedman’s and Bernanke’s interpretation of the Great Depression. Americans revered Greenspan, to a large degree because their lives had gone haywire from distortions that only economists could explain, and Alan Greenspan was the world’s most famous economist.
He was a celebrity. In today’s culture, that meant he could say anything. Finance kept borrowing and leveraging, believing (or pretending to believe) that its fortunes would continually compound. Fifty years, or maybe a hundred years, of accumulating imbalances—of finances and beliefs—have reached their logical conclusion in New York City. We are unlikely to see its kind for a long while.
You’re the Top!
A walk around town is a testament to the man who turned the country into a leveraged carry trade (see Chapter 10). Many people on Wall Street cashed in, even if the banks they ran were struggling for survival. Robert Rubin collected $150 million from Citicorp in the decade after he left the Treasury Department.21 Yet, until the bubble burst he had “no familirity at all with CDOs”22 Citicorp had received $45 billion from the federal government when Rubin left. Goldman Sachs’s CEO Lloyd Blankfein received a $68 million bonus in 2007, before his firm needed the protection of the Federal Reserve in 2008.23 Between 2000 and when it failed in 2008, Lehman Brothers’ CEO Richard Fuld received $484 million in salary, bonuses, and stock options.24
21 Josh Fineman, “Rubin’s Career at Citigroup Ends after $20 Billion of Losses,” Bloomberg, January 10, 2009.
22Grant’s Interest Rate Observer, February 22, 2008, p. 1, quoting article in Fortune magazine.
23 Miles Weiss, “Goldman Change to Bonuses Helped Cut Compensation Costs in 2008,” Bloomberg, March 13, 2009.
William Zeckendorf ’s prediction has come true, except for one misestimation: it is no longer a middle-income town. In Manhattan, 51 percent of neighborhoods are identified as high income and 40 percent as low income.25 In 2006, New York investment bankers were paid a weekly wage of $16,849 a week; the average weekly pay for all private-sector jobs was $841 (not necessarily in New York).26
Inflation has priced out the middle class. By 2005, 57 percent of Manhattan residents over the age of 25 were college graduates; 25 percent held graduate degrees.27 The majority of adults in Brooklyn, Bronx, and Queens did not speak English as their first language.28
“Forty is the new thirty,” noted Richard Coraine, of the rising price of entrees, including the 1¾-ounce lunchtime lobster appetizer ($42) at the Modern, his restaurant in New York.29 Shopping in New York City was beyond the reach of more Americans. Stores started to accept euros and other foreign currency as payment for merchandise.30
Manhattan is structured for the rich. Whole Foods opened a 71,000-square-foot supermarket at Columbus Circle, on the upper West Side.31 Yet, there are one-third fewer supermarkets in the five boroughs than there were six years ago.32 Retail space rose to $500 a square foot on the Upper East Side; restaurants and groceries abandoned the space amidst “the Big Bank-Leasing Madness.” According to the New York Post, “[o]nce lively shopping stretches.… now resemble banking malls.”33
24 Brian Ross and Alice Gomstyn, “Lehman Brothers Boss Defends $484 Million in Salary, Bonus,” ABC News, October 6, 2008.
25Sam Roberts, “Study Shows a Dwindling Middle Class,” New York Times, June 26, 2006.
26David Cay Johnston, “Pay at Investment Banks Eclipse All Private Jobs,” New York Times, September 1, 2007.
27Patrick McGeehan, “New York Area Is a Magnet for Graduates,” New York Times, August 16, 2006.
28 www.city-data.com/top2/his.html.
29Jodi Kantor, “Entrees Reach $40, and, Sorry, the Sides Are Extra,” New York Times, October 21, 2006.
30Angela Moore and Bill Berkrot, “‘Euros Accepted’ Signs Pop Up in New York City,” Reuters, February 6, 2008.
31Robin Shulman, “Groceries Grow Elusive for Many in New York City,” Washington Post, February 19, 2008.
Noteworthy apartment buildings continued to rise in 2008. They were built on CDOs. New York is more dependent than ever on the financial industry. Between 2000 and 2007, tax revenue rose 41 percent.34 In 2006, the top 1 percent of taxpayers paid nearly 48 percent of the city’s personal income tax, compared to 34 percent two decades ago.35 Finance occupied an ever-growing percentage of Manhattan office space, and Fifth Avenue shops paid the most expensive retail rents in the world, double the cost of five years before.36
Apartment prices were still rising in 2008. Gregory Heym, from Terra Holdings LLC, explained: “At the high end of the market, you are dealing with wealth and not income. People buy apartments with cash.”37
William Zeckendorf III (the visionary’s grandson) has built the finest apartment house since the early 1930s: 15 Central Park West. Designed by esteemed architect Robert A. M. Stern, its twin 41-story towers cast silhouettes a few blocks south of the San Remo. Zeckendorf paid $400 million for the land. There was a lot of headshaking at this folly. He sold the apartments before completion. Financially, it is “the most successful apa
rtment building in the history of New York.”38
Lloyd Blankfein, chairman of Goldman Sachs, is a resident. Sandy Weill, former chairman of Citigroup, paid $42 million for a penthouse.
The apartments are laid out “almost exactly like classic apartments from the 20s, with semi-private elevator halls, large entry foyers, formal dining rooms and libraries.” There is a waiting room for chauffeurs, 80 wine cellars, and maids’ apartments, sold separately.39
At 15 Central Park West, inflation has now hit the top. This is the history of inflation: it moves, from the bottom and doesn’t stop until it consumes the top. One of the apartments, sold by the Zeckendorfs for $21.9 million, went on the market for $80 million. Another was offered for $90 million, and a third for $150 million.40 Paper money is in abundance, CDOs are worthless, the skills honed to create and sell derivatives are sitting in Bryant Park drinking café lattes. In the estimation of architectural critic Paul Goldberger: “No one knows, of course, whether the speculative frenzy at 15 Central Park West will hold. But since the building was created to support the fantasy of living in the 20s or 30s, it’s no big deal to pretend also that it’s 2005, when prices were still soaring. At 15 Central Park West it’s still 2005—unless, that is, it’s really 1929.”41
33 Steve Cuozzo, “Prime Neighborhoods Overrun by Big Bank-Leasing Madness,” New York Post, January 2, 2007.
34 Nicole Gelinas, “New York’s Next Fiscal Crisis,” City Journal, Summer 2008.
35 Ibid. The 2006 figure is “even after adjusting for the temporarily higher tax rate.”
36 Cushman & Wakefield, “1Q Report Shows Manhattan Office Rents Are On the Rise,” news release, April 4, 2006.