Seth Klarman: Greenspan "aided and abetted the housing market excesses"
In a new interview with the Harvard Business School Alumni Bulletin, The Baupost Group President Seth Klarman rips into former Fed Chairman Alan Greenspan:
As Fed chairman, when he advised people not very many years ago to take out variable rate mortgages, he aided and abetted the housing market excesses. When he said there was irrational exuberance in the market [in 1996], he was basically right. But then he didn’t act even though he had plenty of levers he could have pulled that didn’t have to do with changing interest rates. He could have raised margin requirements, for example. But instead, he came up with the ridiculously lame idea that bubbles need to be allowed to run and that the Fed can clean up the mess afterward, which only had the effect of inflating subsequent bubbles, most notably the housing bubble that came as a result of the easy money. So he’s just been unaware of the impact of his encouragement, and his inaction got us into the terrible mess we’re in today. It’s not all his fault, but I hold him largely responsible for it.
Klarman also has some choice words for securitized products and those who bought them:
It’s not amazing that securitized products were created. There are huge financial incentives for the people involved. What’s amazing is that anybody actually bought them. That’s because they’re created with a one-dimensional idea of what the economy and the world are going to do. If you have nothing but good times, then securitization makes tremendous sense. But securitization, for all of the commingling and diversification it gives you, also gives you a lack of transparency. So if you have an environment like the one we have now, the assets that have been securitized actually make you worse off than if they were just held as whole loans. The unanswered question is how did the smartest people in the world who run the major Wall Street firms not understand that these products were toxic and end up getting caught with them on their books?
Read the entire interview.