Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.
“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac, and the Treasury and Fed bailed out Bear Stearns Cos. and American International Group Inc.
“It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t stand up,” Greenspan said.
NOTE: This is the same Alan Greenspan who said this in 2004:
“American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.” Understanding household debt obligations, Federal Reserve Board, Feb. 23, 2004
He said it at a time when there had been warnings since 2001 athat opening up the home equity market would end in disaster. Here’s summary of the disaster that Greenspan’s advice and program wrought.
The New York Times reported this epitaph of the Greenspan housing boom from a 2006 Gramlich speech to the Federal Reserve:
“Why are the most risky loan products sold to the least sophisticated borrowers? The question answers itself – the least sophisticated borrowers are probably duped into taking these products.” New York Times, Dec, 18, 2007
Is Greenspan issuing a preemptive covering statement in anticipation of some big banks going under? Interesting. Michael Collins