Bad Advice

The extent of German banks’ exposure to the US mortgage crisis is becoming more apparent each day as the bad news continues.  On Friday it was revealed that Deutsche Bank is a major creditor to an insolvent US mortgage lender, HomeBanc Corp. Today, Deutsche Bank announced it had retained former Federal Reserve chairman Alan Greenspan as an adviser to its investment banking business: 

"Dr. Greenspan’s position as one of the architects of the modern financial system gives him a unique perspective from which to help our clients make critical risk management decisions," said Josef Ackermann, chairman of Deutsche Bank’s management board and its group executive committee.

There is a great deal of irony at play here, for Greenspan bears a great deal of blame for the mess we are in due to the reckless lending practices of the past decade. It was Alan Greenspan who urged American homeowners to switch to Adjustable Rate Mortgages, essentially playing Russian Roulette with the credit markets.  Now, many of these homes are in foreclosure, since the owners can no longer afford the high interest rates.

Alan Greenspan is revered by Wall Street executives as a God and a Seer, who can do no wrong.  But some are brave enought to point out that the emperor has no clothes.  Nearly nine months ago a commenter ("Wolf") on the Web site of Die Zeit wrote:

"Greenspan ist ein “Hack”, der unverantwortlich die idiotische Steuerpolitik der USA unterstuetzte und Leuten geraten hat variabele Hypotheken aufzunehmen. Auch das war unverantwortlich. Anstatt die Immobilienblase zu verhindern hat er sie aufgeblasen. Offensichtlich hat er keine Ahnung wie sich das auf die Konsumenten auswirkt.
Wer hier in USA wohnt, und die Entwicklung miterlebt hat, weiss wie gefaehrlich die Immobilienblase ist. Investieren in Haeuser mag in gewissen Masse nicht bedenklich sein. Aber ueber Jahre waren die meisten Investitionen in Immobilien. Und das nur wegen steigender Preise. Und die Belastung der Haushalte ist erheblich. Viele Leute wissen gar nicht wie hoch ihre monatlichen Zahlungen sein werden."

Yes, "Hack" is the best characterization of Greenspan, the architect of our current market crisis.

One additional comment on the involvement of German banks in the US subprime mortgage mess.  When I was working as corporate banker, I noticed how the WestLB seemed to participate in every credit disaster that came along.  Whether it was the Mexican debt crisis of the 1980s, the bankruptcies of the biggest leveraged buy-outs (LBOs) or lending money to the corrupt Enron Corporation, WestLB was always there with a big exposure. But WestLB never really had to pay a price for its incompetent management and reckless credit policies, since it was a quasi-state institution, backed by the taxpayers of North Rhine-Westfalia.  Now the NRW taxpayers can count on seeing their taxes used once again for bailing out the bank from its own disasterous mistakes. WestLB has disclosed that it invested $1.75 Billion in the junk mortgage securities.