Congressional investigators repeatedly, verbally pummeled former U.S. Federal Reserve Chairman Alan Greenspan Thursday, for what lawmakers charged was a lack of oversight for a mortgage and housing market run amok - - a lapse they believe encouraged a subprime financing boom and collapse that led to the global financial crisis.

Greenspan, looking subdued but characteristically composed as he testified before the House Committee on Oversight and Government Reform, conceded that a flaw in his free-market ideology contributed to a "once-in-a-century credit tsunami," Bloomberg News reported Thursday.

Greenspan: mortgage risk was miss-priced

The flaw, Greenspan said, was the failure by banks and mortgage lenders to properly price risky mortgage assets, including subprime / Alt-A mortgages, The Washington Post reported Thursday. Further, Greenspan said he saw "no choice" but to force the financial firms that package mortgage loans to "retain a meaningful part of the securities they issue" - - thus mandating that if the loans go bad, they will lose money, as well.

Further, Greenspan said he was "partially" wrong in his opposition in recent years to the regulation of derivatives, Bloomberg News reported Thursday - - in stark contrast to his May 2005 speech opposing derivatives regulation.

Economist David H. Wang told BloggingStocks Thursday that the failure to regulate and review lending practices by banks and mortgage lenders was a bipartisan failure.

"Both political parties are responsible because neither Democrats nor Republicans, not just Republicans, cared about the quality of mortgages banks approved during the housing boom," Wang said. "It was like grade inflation in college where the professor gives 'C' grades to students whose work only deserves a 'D.' No one cared about the quality of the loans as long as they were sold and no longer on their balance sheet. In the future, loan originators must retain partial equity in the loan to make them accountable for mortgage defaults."

Former U.S. Federal Reserve Chairman Alan Greenspan believes financial market turmoil that disrupted the bond market and created liquidity concerns may extend into 2009, Bloomberg News reported Tuesday.

However, Greenspan said the Fed's efforts in March to revive credit have reduced instability. "Things do at this particular stage look a little bit better," Greenspan told Bloomberg News via a conference call, but added that financial doldrums are likely to linger a "good number of months or into next year."

Further, when asked if the U.S. economy was in a recession, Greenspan said, "We are on the brink," Reuters reported Tuesday.

Greenspan's remarks occur one day before the now Ben Bernanke-led Fed announces it interest rate decision, on Wednesday at 2:15 p.m. EDT. The Fed is widely expected to keep interest rates the same, while in its accompanying statement also striking a balance between concern over rising inflation and a pronounced economic stall.

Those familiar with former U.S. Federal Reserve Chairman Alan Greenspan's observations about macroeconomics, in general, and the U.S. economy, in specific, will remember his comments regarding "irrational exuberance" -- imprudent buying of stocks; and "the conundrum" -- the tendency for long-term interest rates to remain low, despite Fed increases in short-term interest rates.

Enter a third: the "pale recession."

Greenspan Monday said the U.S. economy has slipped into an "awfully pale recession" and may continue to experience doldrums for the rest of 2008, Bloomberg News reported Monday.

Further, regarding the economy, Greenspan added that "we are clearly receding" and said it was too soon to declare an end to the credit crisis created by the collapse of the subprime mortgage market and housing sector correction, Bloomberg News reported. Greenspan declined to comment on monetary policy.

Every economic problem or setback seeks a scapegoat -- someone decision makers, pundits, and others can blame (unjustifiably) for a turn of events that's preferred by virtually no one.

The criticism is parsimonious, unfair, and injurious -- but that hasn't seemed to stop practitioners from venturing forth with charges that are often tenuous, if not absurd.

Scapegoat-of-the-moment

The ever-incisive FT columnist Martin Wolf points out that former U.S. Federal Reserve Chairman Alan Greenspan is being cast as 'the villain' for the housing bubble, its bursting, and consequent impact on credit/bond markets and credit availability. All of it is unfair, Wolf notes, and he provides ample evidence to support his point.

Chiefly: Greenspan did not create low, long-term interest rates. The low, long-term rates were caused primarily by a global savings glut, Wolf said. (See: China's savings rate.) The Fed had little control over this -- Greenspan even creatively and accurately referred to the Fed's inability to force long-term rates higher despite the Fed's best effort: he called it "a conundrum." Given the surplus savings sloshing around in global markets at that time, among other factors, those low rates would have occurred regardless of who was Fed chairman.

Former U.S. Federal Reserve Chairman Alan Greenspan predicted that the decline in U.S. home prices will probably end "well before" early next year, as the home inventory supply declines, Bloomberg News reported Tuesday.

Further, Greenspan sees most of the excess inventory eliminated in early 2009, with home prices stabilizing "well before that."

U.S. home inventories total a 9.5- to 10-month supply, at current sales rates, depending on the survey. A normal home sales market typically has a 3-4 month supply.

Revisionist critique

Generally recognized as one of the premiere central bankers in the modern era, Greenspan's legacy and policies have been subject to revisionist criticism, largely as a result of the U.S. housing recession. Critics charge that the Greenspan-led Fed lowered interest rates too much to stimulate the U.S. economy following the September 11, 2001 terrorist attack on the United States. The over-stimulation, critics argue, led to the recent housing bubble. Second, critics say the Fed did not prudently exercise its regulatory power, which led to a collapse in underwriting standards, and the record mortgage defaults that precipitated the credit crunch following the bursting of the housing bubble in 2007.

MAJOR PAPERS:

• General Motors Corporation (NYSE: GM) and Ford Motor Company (NYSE: F) want to export more of their vehicles around the globe, and are getting a lift from new labor contracts and the weak dollar, which they believe will translate to bigger profits, the Wall Street Journal reported.
• The Wall Street Journal also reported that former Fed chairman Alan Greenspan has been criticized for how he handled the economy before retiring two years ago, and is under attack for policies that many say started the current financial crisis.

OTHER PAPERS:

• According to a person with knowledge of the matter, the Seattle Post-Intelligencer reported that The Boeing Company (NYSE: BA) is likely to announce a new delay of at least six more month for the 787 Dreamliner this week.

WEB SITES:

• According to 'numerous sources,' Housing Wire reported that Washington Mutual Incorporated (NYSE: WM) may have decided to exit wholesale mortgage origination.

Alan Greenspan must have gotten up on the wrong side of the bed. He sees the growth of the US economy at zero now and believes that a contraction in GDP is likely. He added, according to Reuters, his view that the oil boom will "go on forever."

It sounds a bit like stagflation. Negative GDP combined with ongoing high prices in a key commodity.

If Greenspan is right, one of the critical forces in the US economy will vex economic growth for some time to come. High oil could wreck the chance for recovery in a number of industries lead by the automotive, retail, and airline sectors.

Greenspan made his share of mistakes as head of the Fed. The current Fed governors better hope he is wrong now.

Douglas A. McIntyre is an editor at 247wallst.com.

Experienced fishermen know that sometimes the fishing is good -- and sometimes, it ain't.

Bloomberg reports on Mark Fishman, a famed bond trader previously with SAC Capital. His main fund, Sailfish Capital Partners LLC, has lost about half its assets since July because of soured investments and clients pulling money, according to two investors, cited in the article.

Fishman, 47, Sailfish's investment chief, left SAC in March 2005. After losing more than 12% in August, clients pulled about $400 million from Fishman's Multi-Strat fund this month alone, cutting assets to $980 million. Bloomberg cites increased mortgage defaults and credit markets seizing up as two reasons hampering performance at Sailfish.

I wrote recently about former Fed Chairman, Alan Greenspan, joining up with a leading hedge fund. Maybe Alan's looking to catch a few bond-trading fish to join him.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

The Wall Street Journal is reporting today that Alan Greenspan, whom some believe had fueled the housing bubble, has joined Paulson & Co., a hedge fund with almost $30 billion under management.

The former Federal Reserve Board chairman has created an advisory firm, Greenspan Associates, and will be consulting with various firms in different industries.

Fed after 18 years as chairman, Greenspan left in January 2006. The Journal article quotes some (unnamed) Greenspan's critics claiming that he "helped fuel the housing bubble by keeping interest rates at 1% from 2003 to 2004, and then raising them too slowly."

Whether or not you view Greenspan as the cause of the problem, its symptom, or its savior, this is good news for Paulson, a firm which saw one of its credit hedge funds rise by about 590% thanks to bets that the housing market would weaken and that mortgages given to borrowers with sketchy credit would drop in value.

Good luck in your new job, Alan.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

In an essay/column in this week's issue of The New Yorker magazine ("Paulson's Plan," December 17, 2007) writer James Surowiecki offers a more-somber analysis of the subprime mortgage default issue than, say, Financial Times' columnist Martin Wolf.

In Surowiecki's analysis, (which, readers should note, was researched and published before the European Central Banks' infusion of $500 billion Tuesday to ensure year-end liquidity for banks), the current problem is one unlike any other that Wall Street has faced. The problem is not liquidity, as Martin Wolf argued, but 1) high-risk home owners who spent way too much n overpriced houses, and 2) a deep mistrust of the financial system because of the way the system rates and values assets like mortgages.

At issue: Wall Street?

Hence, the Bush Administrations' proposed assistance plan to the mortgage sector and some homeowners, even if it becomes more-encompassing, would not solve the problem: the financial system - - and presumably Wall Street - - simply does not rate and value assets correctly, and the government package doesn't speak to that dimension.

There has been a chorus of critics emerging of late with a simple message for Alan Greenspan: Shut up.

His latest interview on This Week With George Stephanopoulos will probably do little to stifle that criticism. He told the ABC program that the government should provide direct financial assistance to homeowners having trouble making their mortgage payments. While he concedes that would create short-term budget problems, he believes it will be more effective than the a rate freeze.

Let me get this straight: In the midst of huge budget deficits, we should use taxpayer money to bailout people who are having trouble making mortgage payments because they were sold houses they couldn't afford.

When the typical investor speaks, Wall Street listens, to a degree. When Alan Greenspan speaks, Wall Street listens very closely.

Greenspan, who served as Chairman of the U.S. Federal Reserve for 18 years, said that while it's too soon to say a U.S. recession is up ahead, "the odds are clearly rising," National Public Radio reported. Greenspan added that U.S. economic growth is "getting close to stall speed."

Greenspan, 81, left the Fed in January 2006 after nearly two decades as leader of the world's most powerful central bank. When he left, the U.S. economy was growing at or near trend levels, or what economists call 'sustainable growth' levels.

However, the increase in subprime mortgage and related asset defaults, the housing sector's correction and persistently high energy prices, are expected to cool the current U.S. economic expansion, which began in 2001. Many economists expect Q4 2007 GDP growth to slow to 2.5-2.9%. Some are predicting an economic recession at the start of 2008. The U.S. economy grew at a 4.9% rate in Q3 2007.

You can't say he didn't try, but Alan Greenspan finally agrees that monetary policy can't be used to safely defuse an asset bubble [subscription required]. In today's Wall Street Journal, Greenspan writes, "After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own." He compares our recent mortgage meltdown to the Dutch Tulip craze of the 17th century and the South Sea Bubble of the 18th century.

He also admits some of the Fed's actions may have helped to fuel this bubble, such as lowering the federal funds rate to 1% in mid-2003 and keeping it there for a while. He things teaser rate ARMs also contributed, but the biggest blame can be placed on the expectation of ever rising prices, which is, of course, what inflates most asset-price bubbles.

Greenspan said he and his colleagues at the Fed believed the threat of corrosive deflation in 2003 after the Internet bubble burst needed the temporary 1% federal-funds rate to fend off that deflationary crisis, but he added, "I did fret that maintaining rates too low too long was problematic." It wasn't until mid-2004 that the Fed started raising rates again but by then the current asset bubble was already inflating and impossible to stop.

With the three largest U.S. banks reaching agreement on a new $80 billion fund aimed at reviving the market for short-term debt, criticism appears to be mounting that the new fund itself may be flawed or may create more problems than it solves.

Citigroup (NYSE: C), the Bank of America (NYSE: BAC). and JPMorgan Chase (NYSE: JPM), the three largest U.S. banks, have reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said, Bloomberg News reported.

The banks want to establish the fund, called the "Super SIV" or master liquidity enhancement conduit ("M-LEC"), as a way to obtain short-term credit to finance high risk / high-yield investments in subprime mortgage loans. The fund would buy some of the $320 billion in assets held in structured investment vehicles, or SIVs. SIVs typically borrowed money to invest in longer-term investments, like subprime mortgages.

When financial world's mavens speak - - such as Alan Greenspan, George Soros, Bill Gross - - the markets usually take notice.

And when the mavens speak in unison regarding economic fundamentals, well, a word to the wise: be certain to record those data points before forming your own conclusion regarding the U.S. economy's health.

Soros, in a lecture at New York University, said the U.S. economy was on the verge of "a serious correction."
"I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Federal Reserve Chairman Ben) Bernanke is seeing," Soros said, Reuters reported.