Greenspan rescued LTCM but isn't wild about new bailout

Greenspan Questions 'Superfund'

By Krishna Guha and David Wighton in New York
Financial Times, London
Friday, October 19, 2007

http://www.ft.com/cms/s/0/0f79b248-7e5c-11dc-8fac-0000779fd2ac.html?ncli...

Alan Greenspan on Friday raised serious doubts over the plan to create a $75 billion-plus investment fund to buy the assets of troubled investment vehicles, warning that it could prevent the market from establishing true clearing prices for asset-backed securities.

"It is not clear to me that the benefits exceed the risks," the former chairman of the Federal Reserve told Emerging Markets magazine. He added, "The experience I have had with that sort of intervention is very mixed."

His comments came amid growing speculation on Wall Street that the current Federal Reserve has mixed feelings about the superfund plan, which was put forward by Citigroup, Bank of America, and JPMorgan Chase with the active encouragement of the US Treasury.

Analysts believe the Fed sees potential benefits in the plan in terms of preventing a possible firesale of assets, and does not think it is designed to allow financial institutions to avoid recognising losses. But they think the Fed is worried the plan could be feeding investor anxiety, and thinks markets might normalise faster if some assets in the troubled vehicles were sold in the market and prices were allowed to find a floor.

Serving Fed officials have not commented on the superfund plan, leading some to conclude they want to keep their distance. The Fed refused to comment on market speculation. The Treasury regards the Fed’s silence as simply reflecting the separation of powers and responsibilities between the institutions.

Mr Greenspan said on Friday: "What creates strong markets is a belief in the investment community that everybody has been scared out of the market, pressed prices too low and there are wildly attractive bargaining prices out there." He added: "If you intervene in the system, the vultures stay away. The vultures are sometimes very useful."

The former Fed chief did not say he opposed the superfund and did not advocate selling assets at firesale prices. He said the 1998 Fed-sponsored rescue of Long-Term Capital Management worked because it took a set of assets that would otherwise have been dumped at firesale prices off the market, allowing prices to find a true equilibrium. But he said today "we are dealing with a much larger market."

Mr Greenspan's doubts about the proposed fund are shared by some of the world's most successful investors.

Warren Buffett told Fox Business Network that "pooling a bunch of mortgages, changing the ownership" would not change the viability of the mortgage instrument itself. "It would be better to have them on the balance sheets so everyone would know what's going on."

Bill Gross, chief investment officer of Pimco, the giant bond fund manager, has called the superfund idea "pretty lame."

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