Sheehan panderer to power; the untold story of how alan greenspan enriched wall street and left a legacy of recession (2010)

PANDERER TO POWER This page intentionally left blank PANDERER TO POWER THE UNTOLD STORY OF HOW ALAN GREENSPAN ENRICHED WALL STREET AND LEFT A LEGACY OF RECESSION FREDERICK J SHEEHAN New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2010 by Frederick J Sheehan, Jr All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher ISBN: 978-0-07-161543-3 MHID: 0-07-161543-1 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-161542-6, MHID: 0-07-161542-3 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the 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INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise To my father, who helped and encouraged me to write this book, even when it seemed futile My confidence and stamina often flagged; his never did This page intentionally left blank Contents Author’s Note ix Introduction to Part Prelude to Power, 1926 1987 Early Years: The Education of Alan Greenspan, 1926 1958 The Dark Side of Prosperity, 1958 1967 19 31 Advising Nixon: “I Could Have a Real Effect,” 1967 1973 President Ford’s Council of Economic Advisers, 1973 1976 47 The 1980 Presidential Election: Boosting Carter, Reagan, and Kennedy, 1976 1980 59 Parties, Publicity, Promotion and Lobbying for the Federal Reserve Chairmanship, 1980 1987 71 Lincoln Savings and Loan Association, 1984 1985 85 “The New Mr Dollar”: Chairman of the Federal Reserve, 1987 95 Introduction to Part The Pinnacle of Power, 1987 2006 The Stock Market Crash and the Recession That Greenspan Missed, 1987 1990 10 Restoring the Economy: Greenspan Underwrites the Carry Trade, 1990 1994 11 Cutting Rates and Running for Another Term as Chairman, 1995 1996 vii 103 109 121 133 viii 12 Contents The Productivity Mirage That Greenspan Doubted, 1995 1997 145 13 “Irrational Exuberance” and Other Disclosures, 1995 1998 157 14 In a Bubble of His Own, 1998 169 15 Long-Term Capital Management: A Lesson Ignored, 1998 181 16 Greenspan Launches His Doctrine, November 1998 May 1999 191 17 “This is Insane!!” June December 1999 203 18 Greenspan’s Postbubble Solution: Tighten Money, January-May 2000 215 The Maestro’s Open-Mouth Policy, June December 2000 227 19 20 Stocks Collapse and America Asks: “What Happens When King Alan Goes?” 2001 237 21 251 The Fed’s Prescription for Economic Depletion, 1994 2002 22 The Mortgage Machine, 1989 2007 23 265 Greenspan’s Victory Lap: His Last Years at the Fed, 2002 2006 283 Introduction to Part The Consequences of Power, 2006 2009 301 24 The Great Distortion, 2006 307 25 315 Fast Money on the Crack-Up, 2006 26 Cheap Talk: Greenspan and the Bernanke Fed, 2007 327 27 “I Plead Not Guilty!” 2007 2008 337 28 Greenspan’s Hometown, 2008 349 29 Life after Greenspan, 2009 361 Appendix: The Federal Reserve System Acknowledgements Index 367 369 371 Author’s Note Following are some explanations of how words with broad general meanings are used specifically Money is used in its broadest form The distinctions between “money” and “currency” (e.g., the dollar) are not addressed Bank refers to the large banks There are about 8,300 federally chartered banks in the United States Maybe 300 of these share responsibility for the current financial debacle If a different type of bank is discussed, it is identified, such as a savings and loan This also applies to hedge funds and private-equity funds Most of them stick to their knitting and act honorably Banks, as they existed when they are first discussed (the 1950s), no longer exist For instance, at that time, the distinction between commercial and investment banks was clear Now, they cross each other’s lines of business The easiest description of these businesses is “financial institutions.” It is comprehensive, but it is vague Therefore, firms are described according to the topic under discussion For instance, Goldman Sachs falls under a discussion of “brokerage firms,” even though it was (until recently) an investment bank Likewise, Goldman Sachs stands under the “underwriters” umbrella when underwriters are discussed An economist—in this book—has received a graduate degree, probably a Ph.D., in economics Most of the economists discussed in this book are the public performers from government–academia–Wall Street and appear on CNBC There are many economists who very good work, but are not part of ix 376 Index Economic stimulation, through monetary policy, 121 Economics, 11–12, 96 “New Economics,” 26–27, 39, 121, 350 supply-side, 68–69 Economist, 195, 286, 299 Education, verbal inflation in, 63–64 Efficient market hypothesis, 26, 81, 81n.37, 112, 187, 318 Ely, Bert, 138 Employment Act (1946), 23 Enron Corporation, 183, 247–248, 284 Ertergun, Mica, 75 Ertegun, Ahmet, 75 E*TRADE, 212 Eveillard, Jean-Marie, 140 Excite@Home, 232 Exxon, 112 F Faber, Marc, 38–39 Fannie Mae Corporation, 266–272, 275, 279, 309, 310 Fatbrain.com, 174 FDIC (Federal Deposit and Insurance Commission), 78–79, 294 Fed funds rate, 368 and 1987 stock market crash, 113 in 1993, 162 in 1994, 128–130 in 1995, 136–137, 139–141, 160, 162 in 1996, 160 in 1997, 161, 162 in 1998, 187–189, 192 in 1999, 208 in 2000, 225 in 2001, 238, 239, 245, 246, 249, 258, 259 in 2002, 258–260 in 2003, 287 in 2004, 293 in 2007 and 2008, 338 and global crisis, 338 over the past two decades, 359 and recession of early 1990s, 122, 123, 125 Federal budget deficit, 77, 84, 113, 126 Federal Deposit and Insurance Commission (FDIC), 78–79, 294 Federal Home Loan Bank (FHLB), 86–87, 91 Federal Housing Authority (FHA), 272–273 Federal (Reserve) Open Market Committee (FOMC), 40, 344 and 1990s stock market bubble, 161–162, 170–172, 174–178, 192–194, 196, 200, 205–206, 212, 225, 285 1995 decisions of, 136–143 and 1998 rate cuts, 187–189 and 2000–2001 economic slowdown, 231–234, 238–245, 249 composition of, 367 and consumer debt‘, 251–257 Greenspan’s control of, 137 and LTCM failure, 184–186 and margin requirements, 220 and productivity claims, 157–160 rate changes by, 368 and recession of early 1990s, 122, 123, 128–130 and subprime market of 1990s, 166 Y2K discussions in, 210–211 Federal Reserve Act (1913), 367 Federal Reserve Board: and 1987 stock market crash, 112 Burns as chairman of, 13, 40, 66n.25 chairmen of, 362 and changes in CPI, 50 diminished influence of, 104 dissolution of, 359 Index Eccles, as chairman of, 20 economic growth mandate for, 23–24 and “the Great Impoverishment,” 358–359 Greenspan as chairman of, 104–107 Greenspan’s control of, 137–139 Greenspan’s early views of, 14, 28, 66n.25 Greenspan’s nomination hearing for, 95–102 and inflation of 1970s, 48–49 and inflation of late 1960s, 39–40 interest rates set by, 66 (See also Fed funds rate) and margin requirements (stock market), 104, 105, 161, 175, 219–220, 223, 286 Martin, as chairman of, 20, 40 McCabe, as chairman of, 20n.5 Miller, as chairman of, 66n.25 at mid-century, 20–22 and monetary base, 134, 216, 248 and money supply, 4, 351, 352, 362 Patman’s threats against, 65 power and prestige of, 115–116 and recession of early 1990s, 122–126, 128–132 Volcker as chairman of, 66, 82, 95 and Wall street collapse of 2008, 345 Federal Reserve System, 224, 367–368 Feldstein, Martin, 239 FHA (Federal Housing Authority), 272–273 FHA mortgages, 273, 277 FHLB (see Federal Home Loan Bank) Fidelity Investments, 130 15 Central Park West, 356–357 Financial activities: in the 1980s, 71–72 and commercial bank bailouts, 78–79 during conglomerate years, 33–36 377 innovation in, 124 junk bonds, 80–81 leveraged buyouts, 80 profits from, Financial concentration, in banking industry, 100–101 Financial derivatives, description of, 109–112, 130–131, 276, 313–314 Financial institutions, Fed bailouts of, 115 The Financial Services Modernization Act (see GrammLeach-Bliley Act (1999)) Financial system: in the 1980s, 1994 deleveraging of, 128–129 1995 inflation of, 136–137 Proxmire’s fears for, Financial Times, 192, 217, 242, 244, 313, 322, 328, 332, 345, 347 First Alliance Corporation, 274 Fixed-rate mortgages, 292 Fleet Financial, 130 FLEX-ARM mortgages, 289 FOMC (see Federal (Reserve) Open Market Committee) Forbes, Malcolm, 74 Ford, Gerald, 5, 47, 52–54, 69, 70 Ford Motor Company, 51, 246 Foreign buying: dollar supported by, 308–310 of mortgage-backed securities, 272 Fortune magazine, 3, 4, 13, 23, 24, 29, 34, 37, 51, 144, 191, 334, 349, 351 Frank, Barney, 268 Freddie Mac Corporation, 266–269, 272, 279, 309, 310, 347n.48 Free-market economics, 15 Friedman, Milton, 21, 37, 42, 68, 288–289, 299, 354 Fritts, Steve, 294 378 Index FTSE (Financial Times Stock Exchange), 246 Fuld, Richard “Dick,” 274, 354 Futures Industry Association, 189–190 G Galbraith, James K., 327 Galbraith, John Kenneth, 66n.25, 361 Garment, Leonard, 31–32 Gates Commission, 36, 37 GDP (see Gross domestic product) Geithner, Timothy, 79, 277, 361 General Electric Corporation, 183, 364–365, 306 General Motors Corporation, 51, 112, 123, 127, 246 General Motors Acceptance Corporation, 306 GeoCities, 174 George Washington High School, 10 German central bank (Bundesbank), 49, 308–309, 351 Getz, Stan, 10 Glassman, James K., 198, 207, 243, 284–285 Glass-Steagall Act (1933), 101, 102, 275–276 Glenn, John, 85 Global Crossing, 248 “Global savings glut,” 310 TheGlobe.com, 191–192 Goebbels, Joseph, 218n.11 “Gold and Economic Freedom” (Alan Greenspan), 28–29, 45–46, 47, 115, 205, 286, 352, 362 Gold prices, 41, 66 Gold standard, 1, 5, 21–22, 27, 28–29, 38, 41, 47, 62, 115, 124, 305–306, 362–363, “gold exchange standard” (see also Bretton Woods), 22, 38, 41, 47, 49, 305–306, 362n.5 Goldberger, Paul, 357 Goldman Sachs, ix, 96, 174, 232, 272, 276, 283, 310, 321, 322, 347n.48, 354, 356 Gone with the Wind (Margaret Mitchell), 315 González, Henry, 115 Gordon, Robert J., 230 Gore, Al, 323 Government agency securities, 309–310 Gramlich, Edward “‘Ned,” 178, 188, 259–260 Gramm, Phil, 163, 217, 245, 322 Gramm-Leach-Bliley Act (1999), 275–277 Grant, Cary, 47, 57 Grant, James, 118, 125, 195, 314 Gray, Edwin, 91–93 Great Depression: Greenspan’s analysis of, 28–29, 205 and money supply, 352 “The Great Impoverishment,” 358–359 Greenspan, Alan: and 1987 stock market crash, 103–104, 112–114 and 1990s stock market bubble, 160–164, 170–178, 191–210, 219–225, 285–287 and 1990s subprime market, 164–166 and 1995 funds rate cuts, 139–141 and 1998 rate cuts, 187–189 and 2000–2001 economic slowdown, 224–225, 237–249 2007–2008 speaking tour of, 341–344 and analysts, consistent-bias theorem, 197, 199, 201 and analysts, upward bias of forecasts, 202, 203, 209, 232, 284 Index and (Wall Street) analysts, 29, 175, 177–178, 193, 194, 195, 196, 198, 199, 200, 201 n.35, 203, 204, 209, 218, 231n.16, 232, 233, 235, 239, 243, 244, 284 and asset inflation (vis-à-vis price inflation), 4, 16, 25, 28, 65, 106, 170, 171, 175, 176–177 awarded, American Hero of 2007, 329 awarded, Department of Defense Medal for Distinguished Public Service, 297 awarded, Enron Prize for Distinguished Service, 248, 284, 297 awarded, Knight Commander of the British Empire, 297 awarded, Order national de la Legion d’honneur, 297 awarded, Presidential Medal of Freedom 297 after retirement, 301–304 Americans’ feelings about, 104, 144, 164, 195, 203, 245, 243, 337–338 on asset inflation, 359 autobiography of, 154, 187, 303, 337–341, and bubbles, states he (and Federal Reserve) has and can pop bubbles, 128–129, 139–140, 161 and bubbles, states Federal Reserve cannot pop bubbles, 192–195, 203–205, 225, 228, 261, 285–286 on bubbles, 192, 203–204, 285, 349–350 campaign for Fed chairmanship, 82–83 debt, refers to as “wealth,” 2, 99, 107, 258, 260, 290 during Carter presidency, 60–67 character and personality of, 3, 14, 15, 27, 193, 211–213 379 and consumer debt, 254, 258, 261 and corporate management earnings bias, 235 control of FOMC/Federal Reserve by, 137–139 on Council of Economic Advisers, 5, 47, 50, 52–57 on credit default swaps, 315–316 and derivatives, 102–105, 110, 113, 128, 130–131, 182, 189–190, 206, 276, 312, 314, 343, 346 dissolution of TownsendGreenspan, 102 early life of, 2, 9–10 economic forecasts by, 3, 6, 13, 16–17, 25, 43, 54–55, 97–98, 119 education of, 3, 10–13, 59–60 and presidential election of 1980, 67–70 as Fed chairman, 6–7, 104–107 Fed nomination hearing for, 95–102 and financial institution bailouts, 115 “Gold and Economic Freedom,” 28–29, 205, 286, 352, (see additional pages under “Gold and Economic Freedom”) on gold standard, 362–363 and housing market, 254, 259–263 image presented by, 2, 52–53, 60, 61 infamous speeches of, 284–286, 289–299 on inflation, 4, 5, 45–46, 48 on investment, 350–352 legacy of, 365 and Lincoln Savings and Loan, 6–7, 85–93 on liquidity boom, 331 and LTCM failure, 181–187, 189 marriages of, 13, 57 and Mexico bailout, 135–136 380 Index Greenspan, Alan: (Cont.) and models, 17, 175, 176, 177, 189, 206, 234, 240, 241–242, 260, 270, 285, 297, 304, 344, 345, 347, 348 and mortgage market, 266–269, 275–278, 280 on National Commission on Social Security Reform, 83–84 and New York City, 2, 5, 9, 22, 51–52, 57, 73–76, 353–354 during Nixon administration, 32, 36–37 and Objectivism, 14–15, 27, 32 open-mouth policy of, 227–235 at Paulson & Co., 345 peer reviews of, 38–39 political influences on, 115–116 political involvement of, 5, 31–32 on possible recession in 2007, 327–329 pre-government career of, 3, 13, 16–17, 33, 42 on price inflation, 351 and productivity, 145–146, 151–155, 157–160, 166–167, 171–173, 194, 218, 223–224, 225, 229, 231, 235, 241, 242, 249, 258 as public figure, 3, 5, 6, 24–25, 42, 52–53, 55–57, 72, 74–76, 227–228, 236, 297, 354 during Reagan presidency, 73 reappointment of, 122–123, 142–144, 216–217 and recession of early 1990s, 117–119, 121–123, 127–131 retirement of, 299–300 self-justification by, 340–348 on shorting the dollar, 316, 317 success of, 1, 56, 60, 61, 83, 118–119, 144, 195, 196, 243, 297, 299–300 as superstar in early 2000, 213–216, 222–224 “Technology and the Economy” speech, 218 Volcker supported by, 82 and Y2K, 210–211, 215 Greenspan, Herbert, 9–10 Greenspan, Rose, Greenspan Doctrine, 106, 193–204, 298, 354 “The Greenspan Fed,” 137–139 Greenspan O’Neil Associates, 98 “Greenspan put,” 79, 106, 189, 249 Greenwich, Connecticut, 323–324, 357 Greif, Lloyd, 319 Gross domestic product (GDP), 234–235 in 1999, 230 in 2006, 325 debt required to produce, 310 in early 2000s, 291 and housing prices, 261 infatuation with growth of, 320 Grove, Andy, 242, 243 Grubman, Jack, 233, 244 Gulf Broadcast Company, 88 Gulf Times (Qatar), 347 Guynn, Jack, 261 H Habibie, B J., 172 Hadfield, Tom, 221–222 Half.com, 217 Halfway, Oregon, 217 Harvard Business School, 81, 222 Harvard University, 12, 24, 26, 143 Harvard Corporation, 323 Hassett, Kevin A., 198, 207, 243, 284–285 Hatzius, Jan, 283–284 HCA (Hospital Corporation of America), 317 Index Hedge funds, ix, 4, 125, 130, 181–182, 185, 187, 189, 271, 272, 301, 303, 305, 313, 315, 317, 319, 321, 322, 323–324, 332, 334, 345 in 2006, 313, 321–324 average pay in, 323 lack of regulation of, 187 (See also specific companies) Heller, Walter, 26, 39, 42, 61 Hendrix, Justin, 222 Henry Jerome and His Orchestra, 10 Hewlett-Packard, 207 Heym, Gregory, 356 Hickey, Fred, 206–207 High-Tech Strategist, 206–207 Hillsborough Holdings Corporation, 117 A History of Interest Rates, 359 Hoenig, Thomas, 192 Home equity loans, 106, 260–262, 289, 290 Hormats, Robert, 96 Hospital Corporation of America (HCA), 317 House prices, 298 from 1997 to 2002, 289 in 1970s, 63 in 2004–2005, 289–294 in 2006, 325 and appraisal fraud, 280 bubble in, 333 and calculation of CPI, 150–151 in California, 293 and consumption, 310 and home equity loans, 290 and household wealth, 260 in New York City, 356–357 House sizes, 22, 51, 358 Household income: in 1973, 36 in 2001, 266 in 2007, 36 in early 1990s, 127 Household wealth, 258, 260, 265 381 Housing market, 63, 250–263, 296–297 in 2004–2005, 293–295 in Arizona, 357–358 bubble in, 245, 261, 313, 333, 343 Greenspan’s elevation of, 106–107 Greenspan’s prediction about, 316 in New York City, 356–357 (See also Mortgages) HSBC Mortgage Services, 328 Humana Incorporated, 80 Huntington, R W., Jr., 221 I I/B/E/S (see Institutional Broker’s Estimate System) IBM (International Business Corporation), 207 Ideal Leasing, 35 Immelt, Jeffrey, 306 Implode-O-Meter Web site, 328, 334 Independent (London), 328 Inflation, 1–2 in 1950s, in 1960s, 39 in 1970s, 5, 41, 43–46, 48–51, 62–63 asset, 321, 343, 359 of asset prices in late 1990s, 170 Boskin Commission study of, 146–149 and calculation of CPI, 147–152, 155 in credit, 173 of financial system in 1995, 136–137 Greenspan’s understanding of, in housing market, 261 Martin’s battle against, 23–24 and the middle class, 355 need for, 287–288 in New York City housing market, 356–357 political influences on, 116 382 Index Inflation (Cont.) price, 350–351 understandings of, 170 verbal, 63–64 ING Bank, 342 Initial public offerings (IPOs), 141, 174 (See also specific companies) Inskeep, Steve, 343 Institutional Broker’s Estimate System (I/B/E/S), 197, 200, 233 Insurance, portfolio, 110–112 Integrated Resources, 117 Intel Corporation, 177, 207, 216, 235, 248 Interest rates: in 1980s, 72 in 1990s, 169 and consumption expenditure, 298 decline in, 262 and global crisis, 338 and house prices, 260 and leveraging, 126 over the past two decades, 359 and recession of early 1990s, 123, 126 and savings and loan problems, 86 zero or negative, 259 (See also Fed funds rate) Interest-only mortgages, 107 International banking crises, 311 International monetary system, 37–38 Internet, 141–142, 196 Internet companies, 10, 216, 217 Investment bankers, average pay of, 323, 355 Investment banks, 124–125, 165 IPOs (see Initial public offerings) Irrational exuberance, 105, 160–161, 163, 240 Irvine, California, 86, 90, 165, 274, 279 IT innovations, 199 J J P Morgan (see also J.P Morgan Chase) 6, 73, 83, 93, 100, 101, 182, 185, 275 Jackson, Alphonso, 272 Jayhawk Acceptance Corporation, 165 James, Clive, 337 Jenrette, Richard, 33 Johnson, Edward C., II, Johnson, Hugh, 329 Johnson, Jim, 275 Johnson, Lyndon, 27, 29, 39 Jones, Edward N., 278 Jones, Paul Tudor, II, 324 Jordan, Jerry, 170, 171, 175, 176, 193 JP Morgan Chase (see also J.P Morgan), 274, 346 Juilliard School, 10 Junk bonds, 72, 80–81, 89, 93 Just-in-time inventory management, 159 K Kaufman, Henry, 220–221 Kavesh, Robert, 11, 59 Keating, Charles, 6–7, 85–93, 117 Keating Five scandal (see Lincoln Savings and Loan Association) Kelley, Edward, 199 Kennedy, John, 26 Kennedy, Robert, 320 Kennedy, Ted, 5, 67–68 Keon, Ed, 318 Keynes, John Maynard, 26 Keynesian economics, 26, 39 King, Mervyn, 331 Kissinger, Henry, 56, 69, 70, 74 Kissinger, Nancy, 74 Koch, Ed, 74 KKR (see Kohlberg Kravis Roberts & Co.) Index Koffler, Stephen, 196 Kohlberg Kravis Roberts & Co (KKR), 79–80, 116–117, 317, 321, 322 Kohn, Donald L., 189 Kosinski, Jerzy, 75, 119 Kraft, Joseph, 55, 56 Kravis, Henry, 317, 321, 357 Kroszner, Randall, 334 L LaWare, John, 136 LBOs (see Leveraged buyouts) Leasco, 35, 351 Le Figaro (France), 341 Lehman Brothers, 272, 274, 275, 301, 310, 315, 317, 321, 347n.48, 354 Leland, Hayne, 110 Leland O’Brien Rubinstein Associates (LOR), 110–112 Leuthold, Steve, 150 Leverage: in 2006, 313 in 2007, 303 in housing market, 272–273 and LTCM failure, 185–186 and recovery from 1990s recession, 124–126 Leveraged buyouts (LBOs, leveragedbuyout firms), (see also privateequity firms), 80, 116–117, 317–319 Levitt, Arthur, 223 Lewis, Ken, 333 “Liar’s loans,” 330 Lidsky, Betti, 295 Lidsky, Carlos, 295 Liman, Arthur, 90 Lincoln Savings and Loan Association (Irvine, California), 6–7, 85–93, 100, 165, 274 Lindley, David, 109 Lindner, Carl, 80, 87–90, 383 Lindsey, Lawrence “Larry,” 128–129, 161–162, 166, 238–240, 251–257, 259, 266, 365 warns Greenspan about ’irrational exuberance’, 240 warns Greenspan about consumer debt and long-term social cost, 258 warns Greenspan about actions not matching words, 162 Ling, James Joseph, 35, 351 Ling-Temco-Vought, 35 Liquidity, 116–117, 302, 325, 331, 363 Lockhart, James, 270 Long-Term Capital Management (LTCM), 181–187, 190 Long-term investment, 350–351 LOR (Leland O’Brien Rubinstein Associates), 110–112 LTCM (see Long-Term Capital Management) Los Angeles, California, 36, 117, 291, 319, 320 Los Angeles Times : “L.A Land blog,” 347 Lucent, 207 Luckman, Charles, 23 M Madrick, Jeff, 59–60 Maestro (Bob Woodward), 171, 236 Mahar, Maggie, 210 Mailer, Norman, 74 Maisel, Sherman, 40 Malle, Louis, 75 Major, John, 323 Mankiw, Greg, 147–148 Manufacturing: 1980s decline in, 78 from 1998 to 2003, 291 from 2000 to 2004, 307–308 in mid-century, 23 overseas plants for, 44 profits from, 2–3 384 Index Margin calls, 128 Margin requirements, 104, 105, 161, 175, 219–220, 223, 230 Maricopa, Arizona, 357 Markey, Ed, 223 Martin, Justin, 17, 195–196 Martin, Steve, 353 Martin, William McChesney, Jr., 4, 20–21, 23–24, 26, 27, 32 n.6, 33–34, 39–41, 44, 65, 66, 115, 126, 201, 287, 300, 305, 350, 351, 362 Mayer, Martin, 4, 21, 88, 90 McCabe, Thomas B., 20n.5 McCain, John, 85, 215 McCulley, Paul, 245 McDonough, William, 186, 187, 247 McNamara, Robert, 29, 75 McTeer, Robert, 206, 247 Meany, George, 43–44 Measuring Business Cycles (Arthur Burns), 12 Media, stock market and, 248–249 Meeker, Mary, 233, 244 Mercury Finance Corporation, 165 Meriwether, John, 183, 187 Merrill, Dina, 74 Merrill Lynch, 116, 131, 144, 232–233, 272, 332, 333, 347n.48, 358 Merton, Robert, 183, 187 Mexico, bailout of, 135–136 Meyer, Laurence, 138, 139 Miami, Florida, 89, 295 Michaelcheck, William, 125 Micron Technology, 207 Microsoft Corporation, 177, 207, 216 Middle class, 252–253, 355 Milken, Michael, 7, 80, 81, 86, 87, 89, 90, 117 Miller, G William, 66n.25 Mills, Susan, 57 Minehan, Cathy, 141, 175, 192, 193 Mishkin, Frederic, 333 Mitchell, Andrea, 57 Mitchell, Joan, 13 Mitchell, Margaret, 315 Models, economists and, 39, 40, 81, 112, 130, 132, 174, 182, 183, 184, 190, 207, 263, 270–271, 332 Modigliani, Franco, 81 Modigliani-Miller theorem, 81 Monetarism, 68, 299, 354 Money: and gold standard, (See also Gold standard) inflation of, 1–2 (See also Inflation) Money market funds, 127 Money supply, 4, 351, 352, 362 Morgan Guaranty Trust Company, 101 Morgan, J P (John Pierpont), 81 Morgan Stanley, 112, 116, 233, 244, 272, 321, 347n.48 Mortgage lenders, 328 Mortgage-backed securities, 266–268, 270–272, 313 Mortgages, 22, 265–280 in 1995, 254 in 2002, 262 in 2004–2005, 293–294 40-year loans, 298 adjustable-rate, 107, 292–293, 328–329, 344 and broker leverage, 272–273 bubble in, 331 collateralized mortgage obligations (CMOs), 130 and Fannie Mae/Freddie Mac, 266–272 FHA (Federal Housing Authority), 273, 277 fixed-rate, 292 FLEX-ARM, 288 held by banks, 312 HELOCs (home equity line of credit), 298 and inflation of 1970s, 44, 63 “Liar’s loans,” 328 Index negative-amortization mortgages, 107 novel products, 298–299 option ARMs, 298 subprime, 296, 329–333, 340 “2 and 28,” 325 Piggyback mortgages, 298 underwriting systems for, 278–280 Wall Street participation in, 273–277 (See also Home equity loans) Moskow, Michael, 194, 196 Motorola, 207 Mozilo, Angelo, 275, 279 M3, 135 Mullins, David, 137 Mutual funds: in the 1960s, 33 of junk bonds, 80 in late 1990s, 142 and recession of early 1990s, 127 N Nasdaq: in 1995, 139 in 1997, 166 in 1998, 188, 191 in 1999, 191, 215–216 in 2000, 215–216, 219 in 2002, 284 in late 1990s, 145 technology stocks on, 216 Nasdaq 100, 177 Nasdaq Composite Index: in 1999, 188 in 2000, 224, 225, 235 in 2001, 237, 238, 246 in late 1990s, 177 National Association of Realtors, 316 National Commission on Social Security Reform, 83–84 National debt, 305 National Industrial Conference Board, 13 385 National policy, economists and, 361 National Public Radio, 343 NationsBank, 130 NBCi, 174 Negative-amortization mortgages, 107 Nehemiah Corporation of America, 273, 291 NetGravity, 174 Netscape, 141 New Century Financial Corporation, 165, 278–279, 328, 330 New Economics, 26–27, 39, 121, 350 New Economy, 196 New Economy conference (2000), 222 New Republic, 353 New York City, 2, 36, 352–357 1920s real estate speculation in, 352–353 1970s migration from, 51–52 and early 1990s recession, 114 as leading economic indicator, 22–23 poverty in, 78 New York Federal Reserve Bank, 66 New York Mercantile Exchange, 220 New York Stock Exchange, 19, 33 New York Post, 347 New York Times, 3, 5, 6, 19, 22, 25, 32, 33, 35, 42, 43, 48, 52, 55, 56, 59, 61, 63, 64, 65, 67, 68, 71, 73–76, 82, 83, 84, 86, 90, 92–93, 117, 118, 133, 134, 141–142, 164, 204–205, 212, 217, 221, 223, 236, 239, 245, 278, 279, 283, 294, 299–300, 327, 337–338, 340, 342, 346, 364 New York University, 11, 59 New York University School of Commerce, Accounts and Finance, 11 New Yorker, 53 New York (magazine), 342 Newsweek, 5, 57, 97 Ney, Robert, 277–278 386 Index Nikkei index, 216, 246 Nixon, Richard, 4–5, 32, 36, 41, 44 Nobel Prize in economic sciences, 26, 81, 112, 143, 183–184, 187, Nock, Albert Jay, 24 Nonbank banks, 99 O Objectivism, 3, 13–15, 27, 32 Office of Federal Housing Enterprise Oversight (OFHEO), 269 Okun, Arthur, 39, 42, 61 Old Economy, 196 O’Neal, Stanley, 333 O’Neil, C Roderick “Rory,” 98 OPEC (Organization of Petroleum Exporting Countries), 49 Opening Minds (Royal Society for the Arts), 200 Open-mouth policy, 104 Oracle Corporation, 207, 216 Orange County, California, 131 Organic growth, 77 Organization of Petroleum Exporting Countries (OPEC), 49 “Over-exuberance,” 16 P Pakistan Telecommunication Corporation, 164 Palm Beach Post, 342 Pandit, Vikram, 353 Parker, Sandy, 13 Paternot, Stephan, 191–192 Patman, Wright, 65 Patrick, Kenneth, 45 Paul, Ron, 224, 286 Paulson, Hank, 79, 272, 334–335 Paulson, John, 302, 345 PCE (see Personal consumption expenditures) Penthouse magazine, 57 People magazine, 55–56, 287 Personal consumption expenditures (PCE): home equity financing of, 290 and housing values, 259 installment debt financing of, 253–254 and rising asset values, 258 Philadelphia Internet index, 235 Philadelphia semiconductor index, 207 Phillips, Susan, 175 Phoenix, Arizona, 357–359 Pimco, 302, 345 Piper Jaffrey Institutional Government Income Portfolio, 130 Playboy magazine, 295 Poole, William, 288 Portfolio insurance, 110–112 Prell, Michael, 159, 169, 175, 177– 178, 193, 197, 211, 218, 225, 253 Presley, Elvis, 60 Price inflation, 350–351 Price stability, 287–289, 297–299 Price targets, by Wall Street analysts, 198 Prime lending, 329n.14 Princeton University, 12, 43, 137–138, 263 Private-equity firms (see also leveraged buyouts), x, 79, 80, 101, 303, 305, 312, 317, 318, 321–323, 329, 351 Private-equity investments, 79–80, 318, 322 Productivity, 106, 152–155 1998 slowdown in, 230–231 BLS definition of, 152 calculation of, 153 and calculation of CPI, 147–152 corporate profits as measure of, 197 Greenspan’s claims for, 157–160, 166–167, 171–173, 194 in mortgage banking, 259 Index Property, meaning of, 364 Proxmire, William, 6, 52, 95–102, 318–321 R Raines, Franklin, 269–270 Rand, Ayn, 3, 9, 13–15, 27, 32, 53, 54, 55, 94, 102, 300, 339 Rattner, Steven, 318–319 Reagan, Ronald, 3, 5, 68–70, 83, 95–96 Real estate loans, 249 in 1920s, 352 in 1980s, 105 in 1990, in New York City, 114 (See also Mortgages) Recessions: of 2006, 304–305 of early 1990s, 104–105, 117–119, 121–131 of early 2000s, 308 forecasting, 234, 241–242 Greenspan’s 2007 comments on, 327–329 measurement of, 234–235 Recovery Ahead! (Herbert Greenspan), 9–10 Reed, John, 114–115 Rees, Albert, 42 Regan, Donald, 79, 82, 92 Resolution Trust Corporation (RTC), 89 Restructuring of debt, 291 Reuss, Henry, 65 Riegle, Donald, 85 Risk management, by banks, 184–186 Rivlin, Alice, 348 RJR Nabisco, 116–117 Roach, Stephen, 49–50 Robertson, Julian, 223, 228–229 Rockefeller, Happy, 74 Rockefeller, Laurence, 75 Rohatyn, Felix, 75, 138 Röpke, Wilhelm, 145 387 Rosenberg, David, 358 Rostenkowski, Dan, 110 Roth, Emory, 352 Rowan, Hobart, 67 Royal Society for the Arts, 200 RTC (Resolution Trust Corporation), 89 Rubin, Robert, 136, 143, 276, 277, 300, 322–323, 354 Rubinstein, Mark, 103–104, 109, 110 Russell, Richard, 345–347 Russia, 172 Rutgers University, 37 S Salinger, Pierre, 75 Salmon, Jean, 45 Salomon Brothers, 183 Salomon Smith Barney, 233 Salon.com, 342 Samuelson, Paul, 26 San Remo apartments (New York City), 352–353, 356 Santomero, Anthony, 259 Sarkozy, Nicolas, 341 Sasser, Jim, 98–99 Savings, personal, 364 in 1999, 258 Bernanke’s perspective on, 310 in early 1990s, 253 proposed tax on, 288 and recession of 1990s, 126 Savings and loans (S&Ls), 86, 88–93 (See also Lincoln Savings and Loan Association) Scholes, Myron, 183, 187 Schoolsnet.com, 221 Schultz, George, 42 Schultze, Charles, 61, 66, 230n.11 Schumer, Chuck, 219 Schwartz, Anna, 344 Schwartzman, Stephen, 311–312, 320–322 388 Index Sears, Roebuck and Company, 99, 100 SEC (Securities and Exchange Commission), 87 Securities and Exchange Commission (SEC), 87 Seiders, David, 280 Seidman, L William, 55, 55n.33, 85, 88–91 Semiconductors, 207, 242 September 11, 2001, terrorist attacks, 245–249 740 Park Avenue, 322, 357 Shanghai Stock Exchange, 327 Sharkey, Thomas F., 91 Shulman, David, 133 Shultz, George, 42 Sichel, Daniel, 159 Silk, Leonard, 61–62 Simon, William, 56 Skadden Arps, Slate, Meagher & Flom, 116 Slichter, Sumner, 24 S&Ls (see Savings and loans) Smith, Greg, 248 Soccernet, 222 Social security, 84, 147, 149, 154 Social Security Commission, 146 Solow, Robert, 137 Soros, George, 131 S&P 500 Index, 169 and 1987 stock market crash, 111–112 in 1991, 128 in 1995, 139, 141 in 1996, 141 in 1997, 141, 278 in 1998, 188, 278 futures contract on, 110n 5, 111–112 Spielberg, Steven, 353 Sprinkel, Beryl, 42, 60 Stagflation, 52 Standards of living, investment and, 350–352 Statistical espionage, Statisticalitis, 40 Stein, Herbert, 61, 227n.1 Steinberg, Jonathan, 322 Steinberg, Saul, 35, 88–90, 117, 322 Steinhardt, Michael, 38 Stempel, Robert, 127 Stern, Gary, 194 Stern, Robert A.M., 356 Stevenson, Richard W., 164 Stiglitz, Joseph, 143, 342 Stock market: 1950 to 1966 rise in, in 1970s, 43 1987 crash, 103–104, 110–115 1990s bubble in, 145, 155, 160–164, 169–178, 191–210, 285–287 and 1990s recession, 127 in 1995, 133 in 1998, 187–188 in 2000, 215–216, 219, 221, 224–225, 229 in 2001, 237–238, 246, 248 as driver of the economy, 175 Greenspan’s predictions about, 105–106 and “irrational exuberance,” 105 (See also Nasdaq; S&P 500 Index) Stock market analysts (see also Wall Street analysts under “Alan Greenspan”), 177–178, 193, 195, 198–204, 209, 218, 232, 239, 243–244, 284 Stock options, 318 Stock-option cash-out plans, 72 Strauss-Kahn, Dominique, 341 Subprime lending market, 1990s, 164–166, 274 Subprime mortgages, 296, 328–331, 340, 357 Summers, Lawrence “Larry,” 143, 276–277, 323, 361 Sun Microsystems, 207 Sunny Isles Beach, Florida, 295 Index Supply-side economics, 68–69, 96 “Sweeping” assets from retail checking accounts, 134–135 Swope, Gerard, 364–365 Sulzberger, Arthur Ochs, 74 Sunday Times (London), 342 Sydney Morning Herald (Australia), 347 Synthetic CDOs, 313 T TACA International, 164 Technology, 196, 200–201, 241 “Technology and the Economy” (Alan Greenspan), 218 Technology industry, 207 and 2000 slowdown, 234, 235 in 2001, 237 profit losses in, 219 and Y2K scare, 216 Television, stock market and, 248–249 Terra Holdings LLC, 356 Terrorist attacks of 2001, 245–247 Tett, Gillian, 313 Texas Instruments, 207 Thomas, Allen, 74 Thomas, Barbara, 74 Thrifts (see Savings and loans) Time magazine, 35, 42, 43, 45, 55–56, 60–61, 70, 96, 101, 289 Townsend, William, 3, 15–16, 353 Townsend-Greenspan & Co., 3, 5, 6, 16, 17, 19, 25, 27, 73, 74, 102 Trans-World Financial, 93 Travelers, 275 Treasury Department, 20, 56, 132, 247, 296 Treasury securities (see U.S Treasuries) Trichet, Jean-Claude, 331–332 Triffin, Robert, 42 Triplett, Jack, 148, 149 The Trouble with Prosperity (James Grant), 125 389 Truman, Harry, 20 Tuccille, Jerome, 27, 83, 96 Turner Broadcasting, 80 “2 and 28” mortgages, 325 Tyco International, 248 U uBid, 174 Uchitelle, Louis, 117–119 Unemployment: in 1970s, 309 in 1980s, 77 in early 2000s, 308 and recession of early 1990s, 127 United Services Advisors, 130 University of Chicago, 26, 37, 42, 334 Urban, David, 320 U.S News and World Report, 64 U.S Treasuries: and 1987 stock market crash, 113 and 1990s recession, 122 inflation-indexed bonds, 147 speculation with, 125–126 yields on, 20, 72, 126, 128, 287 V VA Linux, 211 Vanderbilt, Gloria, 74 Vanguard Group, 130 Verbal inflation, 63–64 Vinik, Jeff, 140 Volcker, Paul, 66, 68, 76, 79, 82–83, 95, 96, 112–113, 115, 121, 191, 201, 221, 346–348 Volkswagen, 49, 308–309 Vreeland, Diana, 75 W Wachovia Mortgage, 328 Wall Street: in the 1960s, 33 “buy” recommendations of, 178 and economic slowdown of 2000, 232 prior to 1950s, 19–20 real estate investments, 273–274 390 Index Wall Street Journal, 39, 82, 96, 133, 141,157, 161, 159, 195, 198, 207, 222, 233, 238, 243, 244, 274, 280, 293, 299, 319, 338, 345, 347–348, Walters, Barbara, 5, 31, 57, 75 Warehouse lines of credit (banks to mortgage lenders), 275 Warsh, Kevin, 334 Washington Times, 300 Washington Post, 280 Washington University, 42 Wasserstein Perella, 116 Wealth: household, 258, 260, 265 transfer of, 290 and unsound business structures, 352 Weidenbaum, Murray, 42, 60 Weil, Simone, 360–365 Weill, Sandy, 356 Westenhiser, Jamie, 295 Westmoreland, William, 37 White, Theodore H., 74–75 Whole Foods Market, 355 Wigmore, Barrie, 81, 88–89 Wilkes-Barre, Pennsylvania, 320 Williams, John, 149, 151–152 Wolfensohn, James, 217 Wolff, Michael, 173–174 Wood, Christopher, 201 Woodward, Bob, 171, 236 WorldCom, 248 Wriston, Walter, 78 X Xerox, 101 Y Y2K problem, 210–211, 215–216 Yellen, Janet, 138, 171, 240, 253 Z Zeckendorf, William, 23, 353, 355 Zeckendorf, William, III, 356 Zell, Sam, 311, 320, 325 Zipkin, Jerry, 75 Zola, Émile, 265 .. .PANDERER TO POWER This page intentionally left blank PANDERER TO POWER THE UNTOLD STORY OF HOW ALAN GREENSPAN ENRICHED WALL STREET AND LEFT A LEGACY OF RECESSION FREDERICK J SHEEHAN New... corner of Broadway and 163rd Street, in Washington Heights Alan s father remained distant Described by one of Alan s biographers as “something of a dreamer, given to aloofness and abstraction,”... Early Years: The Education of Alan Greenspan 92 6–1 95 Do you think Alan might basically be a social climber? —Ayn Rand1 Alan Greenspan was born in 1926 He grew up in New York City Alan s parents,