Greenspan 'Shocked' but his brain does not recover...

Greenspan testified in front of Congress and said that he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities.
Greenspan, whose claim to fame was that he never spoke straight, still refuses to take his share of the blame for the destruction of many lives and livelihoods. His wife is following the McCain campaign and keeps defending the actions of Alan and the gang.

Mr. Greenspan, fess up! You have proved to be Bush's equal. While the latter ensured that our standing in the world was ruined, you made sure that we don't even have our own terra firma to stand on!

Financial Engineering's Atomic Repurcussions (FEAR)

This evening's headlines in the media are about:

• Lehman most likely filing for bankruptcy
• Merrill to be bought by Bank of America (with some help from Fed?)
• AIG in crisis
• WaMu in crisis

Remarks by then Chairman Alan Greenspan

May 8, 2003 - "...The use of a growing array of derivatives and the related application of more-sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries. Derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Concentrations of risk are more readily identified, and when such concentrations exceed the risk appetites of intermediaries, derivatives can be employed to transfer the underlying risks to other entities. As a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient. Individual institutions’ portfolios have become better diversified. Furthermore, risk is more widely dispersed, both within the banking system and among other types of intermediaries and institutional investors. Even the largest corporate defaults in history (WorldCom and Enron) and the largest sovereign default in history (Argentina) have not significantly impaired the capital of any major financial intermediary. Likewise, record amounts of home mortgage refinancing and accompanying declines in mortgage asset durations have not imperiled the principal intermediaries in the mortgage markets, in substantial part because these institutions were able to use derivatives to transfer a significant portion of the convexity risk associated with prepayments of fixed-rate mortgages to investors in callable debt and issuers of putable debt.
Risks Associated with the Use of Derivatives
If derivatives and the techniques for risk measurement and management that they have facilitated have produced all these benefits, why do they remain so controversial? The answer is that the use of these instruments and the associated techniques pose a variety of challenges to risk managers. Inevitably, risk-management failures occur, and in two instances--the highly publicized cases of Barings and Long Term Capital Management--they proved destabilizing. Those that question the net benefits of derivatives see daunting risk-management problems and thus foresee catastrophic outcomes. In particular, they fear that common deficiencies in risk management will result in widespread failures or that the failure of a very large derivatives participant will impose heavy credit losses on its counterparties and yield a chain of failures. Others, like myself, who see the benefits of derivatives exceeding the costs, do not deny that their use poses significant risk-management challenges. But we see ample evidence that the risks are manageable in principle and generally have been managed quite effectively in practice, at least to date. Indeed, credit losses on derivatives have occurred at a rate that is a small fraction, for example, of the loss rate on commercial and industrial loans. Market discipline in the largely unregulated derivatives markets has provided strong incentives for effective risk management and has the potential to be even more effective in the future. To be sure, there undoubtedly will be further risk-management failures. But the largest market participants have such diversified businesses that a risk-management failure involving a single product line is unlikely to be a threat to solvency. Furthermore, risk-management failures are more likely to be idiosyncratic than to reflect common deficiencies in procedure or technique among market participants...."

Alan Greenspan In May 5, 2005 - "...The benefits are not limited to those that use derivatives. The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions, which was so evident during the credit cycle of 2001-02 and which seems to have persisted. Derivatives have permitted the unbundling of financial risks. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries..."

Mr. Greenspan, through his lax credit policies and poor oversight of banks, created the "drunken with credit" marketplace that drove financial engineering. Amazing that people think this guy was a good banker!

The Alan and Ben Show - Don't Worry, Be Greedy

Tow interesting headlines:

Fed may keep open lifeline to financial firms

Fed Sees Turmoil Persisting Deep Into Next Year

According to the article Mr. Bernanke said that the Fed would issue next week long-awaited rules to restrict new exotic mortgages and high-cost loans for people with weak credit.

Looks like Mr. Alan (Greenspan) and Mr. Ben were on a different planet all these years. ANYONE with a brain knew exactly what was going on- new financial products being 'engineered' and sold, by greedy firms and individuals to greedy firms and individuals. Lack of fiscal responsibility, and wanton ignorance of risk by both creators and buyers was evident to anyone who wanted to observe. The federal institutions and the people charged with oversight chose to sit back and smoke cigars.

Now, after the 'fast and loose' train has derailed and destroyed many a life, Ben seems to have seen the light and wants to craft appropriate regulations. The Alan and Ben Show has certainly been trying - to let the financial companies know that they need not worry as the 'Fed' is on their side....those firms can just continue to be greedy.