Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession

by Frederick Sheehan

Alan Greenspan kept his face in the public’s mind with television appearances on Wall Street Week with Louis Rukeyser and Tod ay immediately after Reagan’s 1980 election. In addition to Greenspan’s speaking engagements, there were his contributions to Time’s Board of Economists, consulting relationships, and corporate board memberships. He had a bird’s-eye view of the radical changes in American finance from the board of J. P. Morgan.

  3 Sidney Homer and Richard Sylla, A History of Interest Rates, 4th ed. (Hoboken, N.J.: Wiley 2005), pp. 386 (May 1981), 384 (1986).

  4 Ibid.

  Greenspan in the Eighties: From Expert Forecaster to “Notes on Fashion”

  Greenspan was a regular in Washington, both appearing before congressional committees and serving Reagan’s White House. He was interviewed by the New York Times on March 24, 1981. This would have been read by those who wield influence: “Alan Greenspan, the New York–based economist, has emerged as a major influence on the [Reagan] Administration’s new economic policies. . . . [H]is expertise as a forecaster and consultant through his firm, TownsendGreenspan & Company, [has] enhanced his influence in Washington and his stature in the business and financial community.”5 Whether the Times reporter interviewed TownsendGreenspan’s clients is not clear.

  A 1983 Times profile was accompanied by a three-quarter-page picture of Alan Greenspan leaning forward from the edge of his seat aside his office desk. He bears the determined look of a man with little time for picture taking. The story noted: “For high fees, his clients can buy into a wide array of computerized services, data banks and consultations with the senior economists—or even with Mr. Greenspan himself. His time is the firm’s scarcest resource and, as a consequence, a highpriced commodity. Client lunches with him can run $2,000, a speech for nonclients, $10,000.”6

  The profile followed with his curriculum vitae—board memberships, 200 clients—and the two characteristics common to past interviews: his wizardry with numbers and the enduring image of an ascetic monk huddled like a prophet in a cave: “Mr. Greenspan says he is most comfortable not on television or at fashionable dinner parties, but at work in his New York office. . . . where he is in easy reach of the TownsendGreenspan library and all its blue binders full of statistical data—‘Livestock’ to ‘Loan Activity’ . . . . to ‘Mobile Home Sales.’ Work is so central to Mr. Greenspan’s life, in fact, that little else, except perhaps baroque music, really seems to engage him.”

  5“Talking Business with Alan Greenspan,” New York Times, March 24, 1981. 6 Tamar Lewin, “The Quiet Allure of Alan Greenspan,” New York Times, June 5, 1983.

  And, as always, his detachment from the corridors of power: “Those who know him say they think he would take the job at the Fed if asked, although several thought it would be hard for him to leave TownsendGreenspan.”7

  For one described as being so disengaged from the world, Greenspan had his fill of flirting with it. In the same newspaper that published the 1983 profile, Greenspan was a fixture on the society pages, in the fashion columns, and in television and radio listings. Some names will be known to readers, some have drifted into anonymity. That is the nature of social striving: the chosen are gods and goddesses, the discarded are broken on the wheel of fortune.

  Greenspan joined “some 60 chums” of Malcolm Forbes on Forbes’s yacht to celebrate the publisher’s birthday. Others who sailed included Happy Rockefeller, Gloria Vanderbilt, Arthur Ochs Sulzberger (publisher of the Times), Dina Merrill, and New York City Mayor Ed Koch.8 On another occasion, Greenspan joined Norman Mailer and United Nations delegates from the Netherlands, New Zealand, and Spain to ponder why Carl Bernstein was “wearing a white scarf with his black-tie ensemble at table?”9 Greenspan attended Barbara and Allen Thomas’s annual dessert party: “Among the 65 guests [was]Alan Greenspan, the economist. A chocolate chip cookie freak, Mr. Greenspan was devouring the selection from David’s Cookie Kitchen.”10

  The simple introduction is a demonstration of his rise. Earlier in his career, the Times’s business page noted his firm, TownsendGreenspan, to anchor its source to an entity. Now the Times only mentioned “the economist.” In the chatty, worldly-wise style of “The Evening Hours” and “Notes on Fashion,” Times readers would have felt insulted by a full introduction to the regular partygoers.

  Greenspan turned out at Happy Rockefeller’s gala in honor of Nancy and Henry Kissinger. “[T]he limousines were double-parked on Fifth Avenue, and they stretched around the corner to 62nd Street. . . . Theodore H.

  7 Ibid.

  8 Enid Nemy, “The Evening Hours,” New York Times, August 21, 1981.

  9 John Duka, “Notes on Fashion,” New York Times, December 29, 1981. 10 Susan Heller Anderson, “The Evening Hours,” New York Times, December 31, 1981.

  White, the author . . . summed up the event this way: ‘This is the top 10 percent of every A guest list in town—banking, industry, social and media.’” The A team included Brooke Astor, Felix Rohatyn, Laurence Rockefeller, Art Buchwald, Pierre Salinger, Jerry Zipkin, and Robert McNamara.11 When the 21 Club was reopened after renovations in 1987, the Times reporter thought the restaurant would “go on as it always has: being the frat house, the club, the first aid station of the city’s power brokers.” The Times predicted that Greenspan “will get the same warm greeting [he has] come to expect over the years.”12

  Only a handful of guests were mentioned in a typical “Evening Hours” column, and Greenspan’s name appeared regularly. For most attendees, a mention in the Times’s society pages was more important than an invitation to the party. Given the names present, mention of an economist seems an odd interest on the part of readers. That he often escorted Barbara Walters helped, but he received mention on his own merit. In a long Times magazine feature, “Living Well Is Still the Best Revenge,” “the economist Alan Greenspan” is discussed as being among “the very rich, very powerful and very gifted,” even though Barbara Walters was unable to attend this rendezvous at the home of Oscar and Françoise de la Renta. Others mentioned in this tribute to the anointed include Ahmet and Mica Ertegun, French director Louis Malle (escorting Candice Bergen), Norman Mailer, Diana Vreeland, Jerzy Kozinski (author of Being There), and Giovanni Agnelli (who asked Mailer on Greenspan’s arrival if that “was indeed Alan Greenspan ‘the famous economist’”).13 He was even quoted in a cooking column, as a gourmet judge of chocolate desserts.14

  The inflation in prices during the 1980s was at least matched by the inflation of words, but it does appear that the economist Alan Greenspan was indeed “famous.” In a 1983 Times article about the speaking circuit (“The Superstars”), the Times reader learned: “Mr. Greenspan has emerged as the most sought-after economist by lecture audiences worldwide.” Whether or not this evaluation is inflated is not as important as that it is stated: the Newspaper of Record established reputations. Despite 80 or so speeches a year, Greenspan told the Times, “Speech-making isn’t my business.” More than a few who sat through congressional testimony in future decades would agree, but the man seemed to spend quite a bit of time disavowing what he did the most.

  11 Judy Klemesrud, “The Evening Hours,” New York Times, March 26, 1982.

  12 Frank J. Prial, “ ‘21’ and El Morocco: 2 Legends Reopen,” New York Times, April 29, 1987.

  13 Francesca Stanfill, “Living Well Is Still the Best Revenge,” New York Times Magazine, December 21, 1980.

  14Marian Burros, “Dessert Party: A Feast of Sumptuous Treats,” New York Times, November 2, 1983.

  The opening paragraph of the 1983 Times profile tipped off the attentive reader as to its timing: “Just last weekend, Alan Greenspan attended Henry Kissinger’s lavish 60th birthday party accompanied by Barbara Walters. When not attending such elegant affairs, he can be found on television or in Washington or in the most powerful of corporate boardrooms offering his views on economic affairs, politics and the social issues of the day. At age 57, Greenspan is one of the most popular guests on New York’s party circuit—and one of America’
s leading and most sought after economists. Now, however, the bespectacled, softspoken Mr. Greenspan is being talked about for what would be his most lofty position. He is nearly everybody’s first choice for chairman of the Federal Reserve Board, should Paul Volcker . . . be asked to step aside.”15

  Volcker Loses Support

  While the gourmet economist bettered his reputation, Paul Volcker lost popularity with the people. He was doing the job he was hired to do. He was unpopular in the White House for the same reason. Industrial production did not rise for three years—from mid-1979 to mid-1982. Blue-collar unemployment was over 16 percent.16 The supply-siders and the neo-somethings who set administration policy knew the inflation menace had to be subdued, but choking it to death was proving costly. It was feared that the coming redistribution of congressional seats in the 1982 midterm elections would be directly correlated with the rising unemployment rate. (Higher unemployment would probably benefit the Democrats.) The rising unemployment rate was thought to be a consequence of tight money, so it was time to loosen up. As current voting members of the Fed board stepped aside, the Reagan White House appointed members who would be known as “doves.” They didn’t like inflation, but they were even less enthusiastic about doubledigit unemployment.

  15 Lewin, “Quiet Allure of Alan Greenspan.”

  16 Barrie A. Wigmore, Securities Markets in the 1980s, vol. 1 (New York: Oxford University Press, 1997), p. 39.

  Jimmy Carter had opened the path to financial deregulation in the 1970s.17 The Federal Reserve reduced the reserve requirements of banks (after congressional authorization).18 This helped to expand credit. Total credit market debt—government, corporate, and consumer—grew by $533 billion in 1981 and by $1.1 trillion in 1985.19 The eighties would later be known as the Decade of Greed.

  The greedy federal government spent $128 billion more than it received from taxes in 1982; by 1983, the federal budget deficit swelled to $221 billion. Two decades earlier, Treasury Secretary Dillon considered the $2.5 billion deficit unpardonable.

  Technological developments such as complicated derivative structures and colorful, action-packed computer-trading screens channeled America’s fast-buck energies (the tempo of moneymaking never slowed down after the seventies) into financial solutions rather than the slow, awkward development of production capacity. Internal corporate growth, sometimes called “organic growth,” places limits on how fast a company can get big. A solution that was growing more palatable was to borrow and buy growth. The value of the top 100 mergers by S&P industrial companies rose from 19 percent of gross capital expenditures in 1979 to 66 percent in 1984.20

  17 For instance, caps on interest rates paid by financial institutions were eliminated. Changes that would follow include increasing savings and loan (S&L) deposit insurance from $40,000 per customer to $100,000 and authorization to invest in a broader range of assets.

  18 Congress authorized the Fed to set requirements for all depository institutions in 1980. After passage of the Monetary Control Act of 1980, required reserve balances fell from over $30 billion in 1980 to $20 billion in 1984. Joshua N. Feinman, Federal Reserve Bulletin, June 1993, pp. 569–589.

  19Federal Reserve Flow of Funds Z.1 files, historical tables. Available at http://www. federalreserve.gov/releases/z1/Current/data.htm.

  Most of the excitement was in New York, but the city’s demographics told a sober story. Manufacturing jobs fell from 16.8 percent in 1976 to 11 percent in 1986. The proportion of New Yorkers living under the poverty line rose from 15 percent in 1975 to 23.9 percent in 1985.21

  Precursor to the “Greenspan Put”

  At the beginning of the 1980s, commercial banks were tottering. In the 1970s, they had plowed into the rising market: banks lent to commodity-producing countries. When commodity prices collapsed, so did the loans. Walter Wriston, chairman of Citicorp, led the charge into the Southern Hemisphere. He declared that sovereign governments never defaulted and, to prove himself correct, beggared the U.S. government to bail out Argentina, Brazil, and Mexico after Citicorp’s loans to those countries were on the edge of default.22 The government complied.

  Commercial banks also lent without a thought toward the future in local markets that suffered when price inflation eased: agriculture and home loans. The lenders needed help, so the federal government rescued the hapless banks. Banks came to expect government coddling.

  The Continental Illinois National Bank and Trust bailout is an important precursor to the American financial crack-up. Continental Illinois was the nation’s sixth-largest bank and was overloaded with oil and gas loans and neck deep in sovereign loans.23 On May 17, 1984, a new era of financial collectivism was ushered into being. The Federal Deposit Insurance Corporation (FDIC) decided that the nation’s (by now) ninth-largest bank was “too big to fail.” The FDIC announced a $2 billion capital injection into the holding company. The government followed with other initiatives that are all too familiar today, including $3.4 billion borrowed from the Fed’s discount window.24 The government committed itself to insuring all deposits, not merely the $100,000 deposit limit.25 In addition, it also protected creditors of the holding company.26 This and other wrinkles of the bailout are interesting precedents, too involved to discuss here. A distinction is that of treasury secretaries, then and now. In 1984, “Treasury Secretary Donald Regan blasted the plan as ‘unauthorized and unlegislated expansion of federal guarantees in contravention of executive branch policy,’” but he was ignored.”27 Today, treasury secretaries Hank Paulson (did) and Timothy Geithner (does) hand billions of dollars to the most negligent banks and brokerages.

  21 Robert A. M. Stern, David Fishman, and Jacob Tilove, New York 2000: Architecture and Urbanism between the Bicentennial and the Millennium (New York: Monacelli Press, 2006), pp. 19–20.

  22 The U.S. government did so through advances from the Federal Reserve, the Treasury, the Department of Energy, and the Department of Agriculture. These sums were advanced to Brazil (among others) so that Brazil could repay its debt to Citicorp. James Grant, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken (New York: Farrar Straus Giroux, 1992), pp. 339, 341, 343.

  The Citicorp and Continental Illinois bailouts happened during Paul Volcker’s term at the Fed. What would later be called the “Greenspan put” preceded the future Federal Reserve chairman. (The Greenspan put was the belief that if the markets ever stumbled, Fed Chairman Greenspan would flood the market with money, which would trancate investors’ downside risk while launching a new speculative fury.)

  From a business perspective, it is unfathomable why banks, which are consistently incompetent in the lines of business in which they are authorized to transact, are continually given permission to expand and to enter new lines of business in which they lack experience.

  Leveraged Buyouts and Junk Bonds

  The conglomerate form of financing was dead. In the 1970s, privateequity investments, more the province of insurance companies in the past, were being managed by independent companies. Kohlberg Kravis Roberts & Co. (KKR) was a young privateequity firm in the 1970s, when the “the notion of a buyout was not well understood” (as KKR informs the public on its Web site). In 1979, Kohlberg Kravis Roberts negotiated the first leveraged buyout (LBO) of a public company by a privateequity firm.28 It took KKR over a year to find financing, as well it might. The idea of buying a company by loading its balance sheet with debt (the “leverage” in LBO) was new. This was the means by which the 1980s form of hostile bids for companies took wing, in conjunction with another development.

  24 Ibid., pp. 44–51. In turn, the FDIC took over.

  25During the 1980s, financial institutions were granted the authority to cross lines of monopoly. Savings and Loans (S&Ls) lost their monopoly on home mortgages (hitherto, commercial banks had been barred from this market), and competition grew by leaps and bounds. (As mentioned in footnote 17, the S&Ls received broader authority.) Commercial bank entry broadened the residential m
ortgage market; the growing junkbond appetite of savings and loans, insurance companies, and mutual funds extended the ability of investment banks to underwrite more junk bonds.

  26 Wigmore, Securities Markets in the 1980s, pp. 50–51.

  27 Ibid.

  Michael Milken’s group at the investment-banking house of Drexel Burnham (later to be Drexel Burnham Lambert Inc.) educated the world, and then dominated it, in the fertile laboratory of junk bonds.29 (Junk bonds are those that are rated below investment grade by the rating agencies.) Early buyers of Drexel’s junk bonds had acquired valuable experience in the conglomerate years—Carl Lindner of American Financial Corporation and Saul Steinberg of Reliance Insurance.30

  After his initial success with “fallen angels”—companies that had fallen on hard times and been downgraded—Milken gravitated toward “new-issue” junk bonds. Drexel performed an admirable service by finding investors for some promising companies, with Turner Broadcasting and Humana being early success stories.31

  It was not long before the weapon (junk bonds) and the strategy (hostile bids) discovered each other. One other component was needed: a willing buyer. The mutual fund industry offered 11 junkbond funds before 1980.32

  The early financings were responsibly packaged to permit the companies so structured to cover their debt payments out of projected earnings. By 1983, however, future annual profits (before depreciation and taxes) were projected to be 20 percent less than annual debt payments.33 The deterioration was laid out in clear terms to the buyers, but they were often buying for reasons not explained by the efficient market hypothesis. (This has been the dominant precept in finance and economics over the past few decades: that market prices reflect all known information. This is the backbone of economists’ models, the consistent failure of which would seem to deter them from constructing new models.) Barrie Wigmore, author of a seminal financial study of the period, found that this was one development he could not quantify: “How much the surge in junk bond new-issues in 1983 and 1984 was due to expanded savings and loan powers and the merger boom and how dependent it was on under-the-table incentives to money managers will probably never be resolved.”34