Mozilo, Greenspan failed to act when they saw trouble

WASHINGTON - MARCH 13:  Former Federal Reseve ...

Alan Greenspan

Here’s something to ponder — Who seems more culpable for inaction: Angelo Mozilo, the disgraced former CEO of Countrywide Mortgage, or former Federal Reserve Chairman Alan Greenspan? The winner of the poll will get a used copy of Hamlet (whenever I get around to it).

Based on internal documents from Countrywide and the Fed, both men saw big trouble ahead for their constituents but did nothing to avert disaster.

The Big Money observes that Mozilo’s concerns for the direction of the No. 1 purveyor of subprime loans (now a Bank of America unit) were unusual. Most CEOS claim ignorance of the details of their sinking ships. Think Ken Lay and Enron. But internal emails the SEC  used to press civil charges against Mozilo reveal not only that he knew exactly what was going on but that he was worried about the lending practices at Countrywide:

What makes this case unusual is the clarity and comprehensiveness of Mozilo’s objections to the shenanigans at the company he himself was running. The man that emerges from the SEC’s complaint isn’t the willfully disengaged chief executive we’ve seen in so many other corporate corruption cases. On the contrary, Mozilo systematically sets down a record of everything that is going wrong and how it’s likely to end. Over and over again, he casts himself as the worrier-in-chief, always just on the verge of changing things. To read over the SEC charges against Mozilo is to see in action a grandmaster of the most cynical of corporate arts: the cover-your-ass memo.

The Big Money, Mozilo was a Master at Ass-Covering

Mozilo may have been concerned — or pretended to be concerned — but he never did anything about the company’s lending practices.

Internal documents from the Federal Reserve also reveal that Greenspan spotted trouble but failed to act as well. Wall Street watchers are familiar with Greenspan’s infamous “irrational exuberance” speech in 1996 in which the man known as The Maestro (he played the stock market like a virtuoso) first raised the issue of a stock market bubble. In his new book Bailout Nation Barry Ritholtz  publishes this gem from the minutes of the Federal Open Market Committee, the policy-setting group for the central bank:

“I recognize there is a stock market bubble proble at this point,” Greenspan said in a September 24, 1996, Fed meeting, and declared that raising margin requirements was a solution. “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.”

But the FOMC chair chose not to do so. After the famous “irrational exuberance” speech in 1996, Greenspan thereafter remained silent about speculative excesses that, by late 1999, were terribly obvious to even casual observers.”

Mozilo called liar loans “poison” and Greenspan not only saw the Internet bubble coming but knew exactly what to do about it. Doubtless he saw the dangers of the housing bubble as well. Both did nothing. Mozilo and his top two lieutenants face civil charges of fraud for their action (and inaction); criminal charges are in the works.

So who do you think is more guilty in helping to facilitate the market meltdown of 2008?

Image by Getty

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5 thoughts on “Mozilo, Greenspan failed to act when they saw trouble

  1. In my opinion, Angelo wins hands down. Mozilo didn’t “fail to act” he actively promoted the “poison”. Greenspan’s failings really were mostly inaction. Second, Mozilo profited by it handsomely (and sold his stock so he has kept the ill-gotten gains. Greenspan, despite his failings was, I think, trying to do the right thing for the public. Third, Mozilo’s actions were clearly bad. Greenspan’s actions much more ambiguous.

    Were we in a bubble on September 24th, 1996? The S&P was 686 versus the current 939. Are we in a bubble now? Yes, by 1999 it was a bubble but even then the Fed’s tools are very blunt instruments. The bubble was primarily one sector of the market.

    Mozilo and his ilk were actively robbing people. Greenspan was a policeman who should have done more.

    You should send Hamlet to Greenspan. Mozilo should get Crime and (we can only hope) Punishment.

    • Jonathan,
      In the case of the mid-90s, the Fed’s tools were too blunt. That’s an interesting point — why smack the whole system when one sector is getting out of hand? But did that send the wrong signal that set up the next more dangerous phase in our economy.

      Or setting that aside, what about the housing bubble of the aughts? Mozilo etal were the bartenders plying customers with booze. Greenspan never stepped in. He was an enabler. Greenspan is now laying blame on the housing bubble for excess liquidity in the global system. His 1% interest rates were not a real factor. It doesn’t add up. Not only did he never try to take away the punch bowl to end the party but I would argue he spiked it pretty thoroughly.

      It’s a toss up. But I’ll agree: We can give Greenspan, at a minimum, Hamlet; Mozilo gets Crime and Punishment!

      • I didn’t mean to suggest that Greenspan was blameless. I would certainly agree that Greenspan help create the problem with his advocacy of free market ideology.

        But you asked who was MORE to blame. On that question Mozilo beats Greenspan hands down for the reasons I gave earlier.

      • I basically agree with everything you’ve said except the part about a toss-up. Yes, they both are to blame. But I don’t see how Greenspan’s culpability approaches Mozilo’s.

  2. Actually, my reaction to the Greenspan quote in the Fed transcripts is very different from yours.

    You said:

    “I recognize there is a stock market bubble proble at this point,” Greenspan said in a September 24, 1996, Fed meeting, and declared that raising margin requirements was a solution. “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.”

    But the FOMC chair chose not to do so. After the famous “irrational exuberance” speech in 1996, Greenspan thereafter remained silent about speculative excesses that, by late 1999, were terribly obvious to even casual observers.”

    My problem is that Greenspan’s suggestion that raising margin requirements would have gotten rid of the bubble shows remarkable naivete. The response to the Fed raising margin requirements on stocks would have been two-fold: Goldman Sachs, Morgan Stanley, and others would have sold swaps, etc. outside the Fed’s purview to circumvent the regulation. And Wall Street would also have lobbied (on behalf of all the common people) that everyone should be able to buy Pets.com on leverage. Likely, Congress (at Wall Street’s behest) would have threatened to take away the Fed’s jurisdiction over margins and the Fed would have backed down.

    The reason I raise this old example is that it is a good illustration of two dynamics that were important parts of the story of the crisis. First, the use of unregulated derivatives to circumvent rules. Second, the political economy whereby Wall Street changed the rules in their own favor.

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