In a recent Emerging Markets article: Greenspan Delivers Sharp Warning On SuperFund
Former Federal Reserve chairman Alan Greenspan has warned that plans announced this week to launch a so-called “super fund” – a dramatic attempt by major investment banks to ease the crisis facing credit markets – could have dire repercussions.
...the $75 billion so-called Master Liquidity Enhancement Conduit (MLEC) – proposed by Citigroup, Bank of America, JPMorgan and Wachovia to take on the assets of troubled investments – runs the risk of further undermining already brittle confidence in besieged markets.
“It’s not clear to me that the benefits exceed the risks,” Greenspan said. “The experiences I’ve had with that sort of intervention are two-sided.”
Greenspan drew a distinction between the bail-out of a single large hedge fund to prevent the widespread sell-off of assets – as happened with Long Term Capital Management (LTCM) in 1998 – and efforts to prop up an entire asset class, as in the case of the proposed superfund.
“here we’re dealing with a much larger market,” he said. “They’re not talking about going in and absorbing sub-prime mortgage asset backed [securities]. They’re talking about essentially increasing the liquidity of those who have the SIVs [structured investment vehicles] and the like.”
Greenspan argued that that a delicate market psychology could be speared by the move. “It could conceivably make [conditions affecting investor psychology] somewhat adverse because if you believe some form of artificial non-market force is propping up the market you don’t believe the market price has exhausted itself.
“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 they’re wildly attractive bargaining prices there,” he said.
“If you intervene in the system, the vultures stay away,” he said. “The vultures sometimes are very useful."
He said that the ultimate problem is that events “where we go from euphoria to fear virtually overnight are built into human nature and you cannot really defuse them until the speculative fever breaks.”
“When it breaks, it’s very abrupt and you just have to wait it out,” he added.(From Emerging Markets Article)
There you have it, words of wisdom straight from the expert! A bail-out doesn't seem the most prudent move. At least not if it's one-sided and favors the banks. Wouldn't we only be perpetuating the credit problem?
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