Greenspan's bundle of contradictions

Alan Greenspan is taking advantage of his prominence and daily events in financial markets to get his name in the news. But his comments are a bundle of contradictions: he likes subprime, but not the securitization of subprime. And while he once defended derivatives a category of securities to which collateralized debt obligations (CDOs) belong, Greenspan now is backing off of his support of derivatives.

How exactly did Greenspan arrive at these contradictory positions? According to The Associated Press, Greenspan is defending the subprime mortgage market since it gives access to credit to those at the bottom of the economic ladder -- but he argued that the repackaging and sale to investors of risky home loans, not the loans themselves, were to blame for the current global credit crisis. Meanwhile, according to Bloomberg News, while Greenspan once touted derivatives "for diversifying risk," he now thinks that CDOs have lost their moorings by abandoning credit standards.

I think Greenspan is eager at this point to sell books and to minimize the damage to his legacy. But for all his efforts to have it both ways, he misses a key point in these comments: securitization pays investment banks and mortgage companies to originate mortgages and sell them. And since the credit risk ends up on someone else's balance sheet, the people who create the derivatives don't pay the price when they go south.

Until the costs of bad credit decisions are born by those who create the securities, Greenspan's bundle of contradictions will continue to make no sense for the global economy.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.