Big Mortgage Bang has become a Big I-Banking and Big Mortgage-Insurer problem. Blame it on Greenspan? This reminds me of the anecdote of the new CEO who finds an envelope in his desk drawer with instructions from the previous CEO. The instructions are to, first, blame everything on the previous CEO, and to, second, write a note just like this and keep it in the desk drawer for the next CEO. I remember reading in 1998 while on a flight to Denver for the annual EnerCom Inc. energy conference a transcript of Greenspan’s testimony on why commercial lenders should not be in the I-banking business—why these should be distinctively different businesses. Commercial-bank accounts are insured by the FDIC; securities are not insured. Yet, businesses primarily in the securities business have managed to make themselves responsible for huge mortgage portfolios—traditionally the space of commercial lenders. This obfuscates the problem, as well as the solution. In the 1980s, the federal make-shift Resolution Trust Corp. took on failed mortgages—both residential and commercial—and ended up making a large profit. Today, there is no talk of an RTC, and not because the RTC did not work. Instead, it worked brilliantly well. In all the current talk of what to do, propping up failed businesses and business leaders remains constant, in the name of preventing other business failure. Efforts toward dissolution, write-offs, take-your-hit-and-move-on endeavors—the fundamentals of business Darwinism and capital markets—remain elusive. The current situation may have been allowed to develop under Greenspan, but the laissez-faire approach counted on the federal government letting markets work (business Darwinism) and the greatest threat to capital markets now is that markets are not being allowed to work. There have been examples of intervention under Greenspan, such as with LTCM (Long-Term Capital Management). Private-sector capital partners underwrote LTCM’s obligations and, within six or more months, the LTCM ship was righted by natural market movement, and the 16 participating underwriters made a nice profit. (It is worthy of note that Bear Stearns did not participate in this, and missed a large profit opportunity—in hindsight, another example of “business Darwinism” under way….) As written in the blog posting The Greenspan Chronicles II: The Net Good Gained From Subprime Mortgages, Greenspan believed that it was better to let the overheated lending system make 7 bad loans while 93 good ones went through—or so. “This expansion of ownership gave more people a stake in the future of our country and boded well for the cohesion of the nation, I thought…,” he writes in his autobiography. Today’s financial-markets imbroglio are more the result of not letting the markets work, than of the economic expansion under Greenspan. All markets must find their line, and will almost always overstep them before finding they’ve gone too far. Let the small percent fail, so the rest can thrive. –Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Today,,; See also these blog posts:

The Greenspan Chronicles V: It’s Nuclear!

The Greenspan Chronicles IV: More Corporate Governance Is Needed

The Greenspan Chronicles III: Wealth Vs. Happiness…Why ‘Millionaire’ Isn’t Enough In The Oil Business Today

The Alan Greenspan Chronicles I: Purchasing Civility By Importing Oil (Vs. Land Access)

Alan Out-Takes: More Notes From The Greenspan Dinner

Valentine’s Dinner With Alan Greenspan: Nuclear! Plus, Iraq And ‘Are We In A Recession?’