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Article by ben    (02-21-09 09:19 PM)

Op-ed by Charles Gasparino

ALAN Greenspan showed incredible chutzpah when, just a week after resigning as chairman of the Federal Reserve, he promptly began to cash in on his fame by "earning" $250,000 from Lehman Bros. to meet with the firm's biggest clients.

Not bad for a night's work.

Lehman isn't around anymore - it was blown up by the subprime crisis. But Greenspan is, in a big way - working his magic in the private sector by advising firms on how to make money in these troubled markets.

Earlier this year, high-flying hedge fund Paulson & Co. retained him for its "advisory board." The firm is a noted "short seller" of banks and financial stocks - meaning it makes money when these companies' shares fall.

The thing is, Greenspan is making public comments that inevitably influence public policy and the markets - and some of those comments may well have led to his clients making a nice profit.

In a recent speech to the Economic Club of New York, Greenspan said the recession would likely "be the longest and deepest" since the Great Depression and that Congress might have to allocate more money to save the beleaguered banking system (on top of the billions already gone for the Troubled Asset Recovery Program).

Then he told the Financial Times: "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring" of their troubled balance sheets.

Such a move would wipe out stockholders, sending shares of banks even lower - thus likely benefiting Paulson. It would also protect bondholders - helping another Greenspan client, the large bond-firm Pimco.

Let's be clear here: Alan Greenspan is free to earn a living, particularly after earning government wages during his nearly 20 years as Fed chairman. He's also a smart man with valuable insights into the banking crisis (the Fed is the banking system's primary regulator).

But Greenspan's comments helped torch already beaten-down financial shares, which presumably led to his clients making money. Citigroup yesterday fell 13.75 percent to its lowest close since 1991, finishing at $2.51 a share. Bank of America fell 14 percent to close at $3.93 a share.

There are, of Course, several big reasons for bank shares' fall. The market is losing confidence in the Obama team's ability to reinvigorate the economy and deal with the banking crisis; there's been barely a positive day in the Dow since Treasury Secretary Tim Geithner unveiled his "plan" to save banking last Tuesday.

Plus, the banks keep bleeding losses because of the bad debt on their books. Business conditions on Wall Street stink: No one's making money in trading or investment banking. And, since they're not making money, they're hoarding cash - so they're not lending, either.

But Greenspan's pearls of wisdom clearly contribute to the squeeze - or, as one Citi executive told me, "They certainly ain't helping things."

And Greenspan appears to be benefiting from banking misery that he played a major role in creating.

The mortgage bubble had its roots in bipartisan policies designed to promote homeownership, even for people who couldn't afford a home. But the bubble took on a life of its own sometime in 2001 - right after the dot-com bubble burst and the 9/11 terrorist attacks bashed the economy.

That's when Greenspan hit the panic button, cutting interest rates to their lowest levels in years - sparking a huge rally in housing, and the banking industry's insane buying of risky bonds tied to those mortgages.

In 2007, the bubble burst - and the carnage was immense. The banking system was saddled with hundreds of billions in debt valued at a fraction of its original price, and the credit crunch began - sinking the economy into deep recession.

Greenspan not only helped push the bubble to greater heights, as Fed chairman he was the regulator of big banks like Citigroup. In other words, Citi's venture into becoming one of the largest buyers of risky mortgage-linked bonds occurred under the collective nose of the Greenspan Federal Reserve.

I ran these concerns by Greenspan's attorney, Robert Bennett, who then gave me the following statement: "Dr. Greenspan's views on these matters are his own, not those of his clients. He provides economic forecasting advice to his clients, and does not speak or advocate on their behalf or on behalf of their issues." A Paulson & Co. spokesman had no comment. A spokesman for Pimco failed to return a phone call and an e-mail asking for comment.

Of course, Greenspan isn't alone in talking up nationalization. My DC sources say Geithner & Co. are against it, at least for now. But congressional leaders of both parties have spoken favorably about it as the cheapest way to get banks lending to businesses and consumers again, which is what the economy needs.

Nationalization would have winners and losers. The losers would be the banks' stockholders, who'd be wiped out to zero. That includes many bank employees, who often got paid in company stock.

The likely winners would be the bondholders (who were protected in the takeovers of AIG, Fannie Mae and Freddie Mac) - and, of course, investors who shorted bank stocks.

It just so happens that both of those likely winners are clients of the good "Dr. Greenspan" - who seems to have not even a second thought about telling the world that nationalization could be in the cards.

Charles Gasparino is on-air ed itor at CNBC; his next book, "The Sellout," is on the financial crisis.




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