Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession

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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.

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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.

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Contents

Author’s Note
ix

Introduction to Part 1—Prelude to Power, 1926–1987 1
1 Early Years: The Education of Alan Greenspan, 1926–1958 9
2 The Dark Side of Prosperity, 1958–1967 19
3 Advising Nixon: “I Could Have a Real Effect,” 1967–1973 31
4 President Ford’s Council of Economic Advisers, 1973–1976 47

5 The 1980 Presidential Election: Boosting Carter,
Reagan, and Kennedy, 1976–1980 59
6 Parties, Publicity, Promotion—and Lobbying for the
Federal Reserve Chairmanship, 1980–1987 71
7 Lincoln Savings and Loan Association, 1984–1985 85
8 “The New Mr. Dollar”: Chairman of the Federal Reserve, 1987 95

Introduction to Part 2—The Pinnacle of
Power, 1987–2006 103
9 The Stock Market Crash and the Recession That
Greenspan Missed, 1987–1990 109
10 Restoring the Economy: Greenspan Underwrites the
Carry Trade, 1990–1994 121
11 Cutting Rates and Running for Another Term as
Chairman, 1995–1996 133

vii
_viii
Contents

12 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 LongTerm 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
19 The Maestro’s Open-Mouth Policy, June–December 2000 227
20 Stocks Collapse and America Asks: “What Happens
When King Alan Goes?” 2001 237

21 The Fed’s Prescription for Economic Depletion, 1994–2002 251
22 The Mortgage Machine, 1989–2007 265

23 Greenspan’s Victory Lap: His Last Years at the Fed,
2002–2006 283

Introduction to Part 3—The Consequences of
Power, 2006–2009 301

24 The Great Distortion, 2006 307
25 Fast Money on the Crack-Up, 2006 315
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
367
Acknowledgements
369
Index
371

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 privateequity 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 do very good work, but are not part of this book. The best are generally unknown to the public, since the only means by which the public would learn of them would be through the publicity they would receive if they joined the performers.

Acquisitions, takeovers, buyouts, and leveraged buyouts (LBOs).
The vocabulary can be confusing. This book only addresses the peak periods.
In the late 1980s,
acquisitions
(also called
takeovers or buyouts
) of companies were often in the form of what were called
leveraged buyouts.
The buyouts during this manic final phase were marked by much more debt financing (bonds, bank loans) than equity financing (cash, stock). The companies leading the buyouts were commonly (though imprecisely) called
leveraged buyout
or
LBO firms
. This period is discussed in Chapter 6.
The largest of these “LBO firms” were actually
private equity firms
(for example, Kohlberg Kravis Roberts & Co. (KKR). The “private” refers to equity not traded on a public exchange. During the culmination of the (circa) 2004-2007 buyout mania, some private equity firms were, once again, using less equity financing and much more debt financing. For all intents and purposes, these deals were LBOs. The media had a difficult time deciding the correct vocabulary (since the amount of equity was so small compared to the amount of debt) and firms such as KKR were called
private equity firms,
or
LBO firms,
or sometimes
buyout firms
. These terms are used interchangeably in Chapter 25.
This book stops at the peak. Sort of. Greenspan could not stop talking. He continued his open-mouth policy into 2009. The more he reminded the public of his existence, the more his reputation suffered. This belated condemnation of Greenspan was inseparable from current events. Also, Bernanke’s Federal Reserve is inseparable from the financial terrain that Alan Greenspan bequeathed to him. I have not attempted to describe this postbust period comprehensively, but only incidentally.
The book concentrates on the United States and mentions events overseas only as they relate to the United States. The change in how Americans thought and behaved over the past half-century has applications in other countries, but that is a very large topic.

1926–1987

[O]peration in securities is not mainly a matter of reasoning at all.… The stock market … is just a bunch of minds—there is no science, no IBM machine, no anything of that sort, that can tame it.
¹

—Edward C. Johnson II, 1963, President, Fidelity Investments

Alan Greenspan’s success was partly due to good timing. He reached maturity at mid-century. His strengths attracted an America in which the process of thinking was changing. Substance was yielding to superficiality. Matter surrendered to abstraction.

Money was becoming more abstract. In 1900, Americans, and citizens of most western European countries, held a currency that was convertible into gold. Americans who distrusted the dollar’s value had the right to trade their paper for gold at a fixed, statutory rate. The value of the dollar fluctuated within a narrow range, and the prices of goods and services were more or less fixed.

Today, a dollar is worth whatever we wish it to be. It is a symbol, no longer fixed to a disinterested, inert metal. Inflation is one result. The successful careers of pandering politicians and clever opportunists are another. An object that cost $1 in 1913 (when the Federal Reserve Act was passed) costs $20 today. Inflation of money was integrated into the

¹
First Annual Contrary Opinion Foliage Forum,” 1963, from Charles D. Ellis and James R. Vertin (eds.),
Classics: An Investor’s Anthology
(Homewood, III.: Dow Jones-Irwin, 1988), p. 392.