The Three Titans, Turned Lilliputians, and the Financial Meltdown

By Inya Ivkovic, MA — The Financial World According to Inya column

First, they were the three Titans. One financial meltdown later, they are the three Lilliputians, in three hot seats before one bipartisan commission assembled in Washington to probe how on earth one obscure market such as subprime-mortgage lending could have brought the entire global economy to its knees.Who are the three Lilliputians? One led the largest bank on earth — former Citigroup’s CEO, Charles Prince. The second was supposed to deliver us from the evils of the Great Recession — former U.S. Treasury secretary, Robert Rubin. The third was once called the “great conductor” of the U.S. economy — former Federal Reserve chairman, Alan Greenspan.
On the menu this week is testimony about the last in “the good, the bad and the ugly” line-up — the ugly subprime mortgage lending debacle. What is expected is a bit of poking for truth and a lot more of political theater. What was blatantly missing was accountability. Just like with the quants I wrote about on Wednesday, I do not see any proclamations of “mea culpa” coming from Prince, Rubin or Greenspan. Recently, both Rubin and Greenspan tried to wash their hands of the triggers that led to the global economic meltdown, saying that almost no one predicted the gravity or the extent of the perfect storm brewing before the global economy. The only problem is that they were thought of and portrayed themselves as the smartest guys in the room to the rest of the planet; so, when they turned out to be just as clueless as the rest of us, well, that kind of arrogance was not likely to be either forgotten or forgiven anytime soon.Additionally, the collective blindness defense is rapidly losing ground. Information about the worst financial crisis in a generation is emerging and the picture is not pretty. Autopsies of Lehman Brothers and Bear Stearns are revealing indefensible conduct and outrageous shortsightedness caused by the greed and recklessness of the few to the detriment of the many. And still, as one (formerly) prominent figure after another describes his or her role in the financial crisis, no mistake is likely to be openly admitted and no failure is likely to be attributed to anyone’s particular (in)action.My favorite among the three Lilliputians is Alan Greenspan. He was at the helm of the Fed from 1987 to 2006. The “maestro,” as some called him during his tenure, loved to bask in the pleasantries of the short-term effects of the environment of interest rates that were ultra-
low he had effectively created. Even as assets bubbles galore grew to dangerous levels, Greenspan stuck to his policy. And when the bubble had burst, he had the audacity to say his mistake was universal and that no one could have known how it could have translated into the kind of systemic risk that eventually destroyed many a venerable institution, including one such as Lehman Brothers.In a television interview, speaking about Lehman’s failure, Greenspan said, “It was the critical mistake. And I made it. Everybody I know who works in this business made it.” Perhaps everybody made the same mistake, but not everybody had the kind of bird’s eye view Greenspan did. Disclaiming his mistake by saying everyone else did it, too, Greenspan somehow manages to add insult to injury. And yesterday, just like the quants before him, Greenspan insisted that his policy at the Fed of maintaining interest rates as low as he did for as long as he did was not an incentive for risky lending(?).

Furthermore, defending his tenure at the helm of the Fed, in a report titled “The Crisis,” which Greenspan wrote for the Brookings Institution, he said he doubted the Great Recession could have been prevented. Although he again attempts feebly to recognize that
“policy makers were lulled into a state of complacency,” he fails to draw parallels between the ill effects of the tech bubble bursting and the build-up in many asset classes. Had he reined in interest rates in time, things could have been very different today.

Alas, the music is playing, but I do not think anyone will get up to dance. It is not so much that I’m missing the “heartfelt” “mea culpa” statements as it is that I’m always hoping questions asked will yield more insight into the past and a clearer view into the future.