Mea Culpa From Greenspan Marks Another Lousy Week

Dow falls, overseas markets plummet as crisis reaches Persian Gulf

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On a week when persistent worries about a worldwide recession pushed stocks lower, and the Treasury Department played matchmaker for an acquisition of a troubled regional bank--National City--by PNC Financial, a chastened Alan Greenspan admitted October 23 before the House Committee on Oversight and Government Reform that he was in a "state of shocked disbelief" at the failure of "lending institutions to protect shareholders' equity." When Committee Chairman Henry Waxman (D-California) asked Greenspan whether "ideology pushed you to make decisions that you wished you had not made," the man who was Federal Reserve Board chairman for 18 years responded by saying "Yes, I've found a flaw. I don't know how significant or permanent it is." When Waxman persisted in asking Greenspan whether the former Fed chairman's belief in the power of the financial markets to regulate themselves was misplaced--"Were you wrong?"--Greenspan answered blankly, "Partially."

As for the cause of the ongoing financial and market crisis, Greenspan conceded that "The evidence strongly suggests that without the excess demand from the securitizers" of bundled mortgages by Wall Street firms, "subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower." Greenspan only offered one fix for the current mess: he recommended that companies selling mortgage-backed securities be required to hold a significant portion of those securities themselves.

Meanwhile, worldwide recession fears pushed the stock markets lower, with the Dow Jones industrials falling October 24 by 312.30 points to 8,378.95, a decline of 5.3% for the week. The S&P 500 index fell 31.34 points to 876.77, ending the week 6.8% down from its close on October 17. For the year, the S&P 500 is off 40.3%.

Major foreign indexes fell even more than U.S. stock indexes during the week. The FTSE Europe Index fell 12.11% for the week ending October 24, while the FTSE Asia index fell 7.67%.

The crisis reached the oil-rich Persian Gulf over the weekend, as the region's finance ministers met in Riyadh, Saudi Arabia, to discuss a growing credit squeeze and falling stock markets as oil prices fell last week to $64/barrel, and where Kuwait's central bank on October 26 intervened to prop up Gulf Bank. OPEC announced a 1.5 million barrel/day production cut on October 24.

Back in the U.S., PNC Financial was the latest recipient of the Treasury Department's largesse from its $700 billion Congressionally approved war chest, receiving a $7.7 billion capital injection and then acquiring the Midwest regional bank National City for $5.5 billion.

In the week of October 27, insurers Aetna and MetLife report quarterly earnings, the Federal Open Market Committee is scheduled to meet October 29 to consider a rate cut, and the government will report third-quarter GDP on October 30.

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