Alan Greenspan | The Finlay Centre for Corporate & Public Governance

The Greenspan Myth and Other Hazards When Men are Called Gods

The once powerful and still influential former Fed chairman took no lessons at all from the carnage of Enron and other scandals that occurred on his watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, and management’s approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker.

Alan Greenspan, who used to be called the voice of “God” when it came to financial matters, appeared before the U.S. House Committee on Oversight and Government Reform this week. But rather than delivering his testimony with heavenly authority, this one-time head of the Federal Reserve gave a performance more like Woody Allen doing an impression of Captain Renault of Casablanca fame. Dr. Greenspan said he was “shocked, shocked” to discover how far astray the markets and financial firms went in the past several years in their abuse of mortgage-related securities.

He put it this way:

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.

This is not the first time Dr. G looked like he had just stuck his finger in a light socket. We thought his vision was a little clouded in March of 2007, when he was among a crowd -which included U.S. Treasury Secretary Henry M. Paulson Jr.- that was pushing for less regulation of business. He said at a conference then that he didn’t see a need for most of the Sarbanes-Oxley legislation of 2002. He joined a loud chorus of business heavyweights who argued that boardroom regulation was sapping the competitiveness of American business. Talk about a near-terminal case of myopia.

Yet it seems odd, with all the carnage from Enron and other scandals that occurred on Dr. Greenspan’s watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, that he still would have relied upon management to protect shareholders. In business, as with most large organizations these days, the right thing does not happen by default or through auto pilot. It requires intricate and robust mechanisms to ensure the right thing is clearly identified and is the subject of constant internal checks. Shareholder protection as far as management is concerned has too often been reduced to the cliché of the fox guarding the hen house.

Here is what we said about Dr. Greenspan’s earlier, and now discredited, view that there was no need for regulation that raised boardroom standards:

If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.

We then asked the question:

What else can’t this man see?

The answers have been coming in battalions of destruction over the past couple of years. The landscape is littered with the ruins of the financial system, the deaths of century-old banking houses, withering consumer confidence in an era of spreading job losses and stock market decimation, and an avalanche of multi-trillion dollar government bailouts and interventions that few can fathom and whose eventual toll in monetary impact and taxpayer cost absolutely no one can accurately predict.

It is significant that one of the main features of the legislation he was telling high paying business audiences not long ago was unnecessary was a provision to make boards more responsible for overseeing financial risk. Risk, as everyone now knows, was the six-ton elephant that was running amok throughout Wall Street, creating disaster out of anything related to subprime mortgages.

We had a different vision of where the world was heading when Dr. Greenspan was trying to turn it back. Twenty months ago, we noted the following:

A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer.

Alan Greenspan is a poster child for an era that was too quick to raise up human beings to godly status and attribute to them, and countless CEOs who were thought to actually deserve the hundreds of millions they received, feats of vision and abilities that mere mortals could not begin to comprehend, much less imitate.

As it turns out, the Richard Fulds, Angelo Mozilos and James Cayneses could not even manage to keep their own companies –or their reputations- from falling into an abyss fashioned by an excess of greed, hubris and poor governance. No, it wasn’t what Dr Greenspan feared: too much regulation like Sarbanes-Oxley. It was exactly the opposite.

The greatest challenge to capitalism and economic stability since the 1930s is in no small measure the product of the unregulated and opaque actions of self-aggrandizing titans of excess, whose overweening ego and blinding greed seldom permitted them to see anything beyond more zeroes at the end of their next paychecks and whose approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker. The boards that should have been the watchful stewards of shareholder interests, but failed thoroughly in that role -as they have in so many times of testing over the past 100 years- were happy to light the match as often as it was demanded.

And Alan Greenspan, it turns out, was somewhat less than the all-knowing font of wisdom he enjoyed portraying and the media and others delighted in extolling. His Congressional appearance was a testament to failure, or at least to the folly of heedless acceptance of a system that worked very well for a few at the top and gave little cause to its adherents, which included Dr. Greenspan, to consider anything else. Conventional wisdom can be such a pleasingly temperate island, especially when its most favored residents are the ones dispensing the wisdom and setting the conventions.

Dr. Greenspan’s testimony included this revealing note:

This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.

That would be a revelation possible only for those in urgent need of a trip to the eye doctor. Normal vision, possessed by most ordinary men and women who have some experience seeing how the real world works and the costly recurring blunders of narcissistic and overrated leaders, would have advanced the conclusion by several years.

Alan Greenspan has been a gifted and erudite figure on the stage of American public policy for several decades. He has also made a number of mistakes. Far greater, however, has been the mistake of many observers who have tried to make of him more than the man of earth he really is. There have been occasions, we think, when he has taken those expectations a little too seriously.

Memo for the future: before society decides to elevate someone to godlike stature, make sure he can at least see beyond the next seven days.

The Malleable Dr. Greenspan

Alan Greenspan, whose selective vision we have written about before, appears to have been “shocked, shocked” that tax cuts were contributing to the mounting deficit in the Bush administration. That is, if you believe his just released autobiography The Age of Turbulence. This is a man who, as head of the Fed until just 18 months ago, had nothing but praise for these same deep tax cuts when asked about them before Congress on several occasions. He wanted them made permanent, in fact. He also seemed to have lost his tongue when it came to raising red flags about other aspects of deficit spending that took hold of Mr. Bush and his fellow Republicans the likes of which no liberal would have dared attempt. Now both figure prominently as a source of outrage in the mind of the once revered oracle of U.S. monetary policy.

I recall Dr. Greenspan having a similar change of heart when it came to Sarbanes-Oxley legislation, which he initially supported along with the White House and both houses of Congress. More recently, however, private citizen Greenspan, who consults regularly to American business, expressed chagrin at the dampening effects of such legislation.

There is a very old toy, still popular with children, called Silly Putty. It is remarkably malleable and can be molded into just about any shape. It is an amusing property for a toy, but not so much for the character of those who hold high office. The public is entitled to expect that its leaders will be forthright in their views when it comes to the responsibilities they hold —not hold back their real thoughts for the best seller list.

How many other momentous events will later turn out to enjoy less support than met the eye at the time? What faulty decisions are being made today in Washington and around the world by figures who could stop them if only they had the courage to speak out. The lessons of Vietnam, and now Iraq, are painful testimony to the consequences of the voices unraised, the silent doubters and those who just could not bother to ask the tough questions.

The world needs leaders who are on the job today, when it matters and when they can effect change for the better, not in the book store telling us about what they really, really sincerely felt —tomorrow.

The Unseeing Alan Greenspan

Get this man a new pair of glasses! Former Fed chairman Alan Greenspan says he didn’t see a need for most of the 2002 Sarbanes-Oxley legislation and “argued that the business scandals that prompted the law didn’t suggest a massive breakdown in corporate governance,” according to the Wall Street Journal.

The remarks were made at a Treasury-sponsored conference on capital markets regulation in Washington this week, the translation of which is a collection of CEOs and Bush administration officials who are trying to figure out how to roll back laws that are forcing CEOs and directors to do their jobs properly or face serious consequences. We dealt with the first volley in that campaign here.

As chairman of the Fed, Dr. Greenspan made a career of talking in guarded terms and convoluted sentences few really understood. That made him brilliant in the eyes of many. Now, as a much in demand $100,000 a pop speaker to prominent companies and business groups, he has finally found a virtue in plain speaking, and is calling in remarkably unequivocal terms for less regulation. Regulation for which he claims he saw no need.

If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.

What else can’t this man see? How about the 200 or so companies who have admitted to backdating stock options so that top management could line its pockets even more. Is that a good testimonial to strong internal controls and vigilant boards at those companies, which include Apple, Research In Motion and Home Depot? How about all the boards today that are demanding more pay because they say the boardroom is not the cozy club it used to be? What were they really doing when Dr. Greenspan could not see any need for change. The consensus of many, including influential committees of the House of Representatives and Senate, is not nearly enough.

Seldom have the capital markets been more shaken than they were by the collapsing corporate dominos that prompted the Sarbanes-Oxley Act –legislation Dr. Greenspan doesn’t see as being necessary. Common to all of these disasters, and to so many that preceded them, was the Typhoid Mary of corporate governance that left company after company with an affliction manifested by palpitating CEO pay, apparent unconsciousness on the part of directors as to what was happening about them, a pronounced inability on the part of auditors to count accurately and a detachment from reality among CEOs often characterized by an abundance of personal jets and decadent parties.

Never in the history of modern American business have so many at the top engaged in such egregious displays of criminal wrongdoing and fraud, and others in outright acts of negligence, leading to such a magnitude of losses in stock value, regulatory penalties and shareholder lawsuits as in the period leading up to and immediately following the passage of the Sarbanes-Oxley Act of 2002. Billions were paid out by Citigroup, CIBC, AIG Insurance and Marsh & McLennan alone to settle litigation brought by outraged regulators and aggrieved investors. And the cost of that era grows almost daily. Just this week, the SEC announced that Bank of America will pay $26 million to settle charges that it issued fraudulent research on a number of companies, including Intel. If the great tsunami of fines, payments, trials and prison arrivals by ex CEOs witnessed day after day by Americans and investors around the world during this period was not indicative of a “massive breakdown in corporate governance” –which Dr. Greenspan never saw– I’d like to hear nominations for that category.

Want to make American capital markets more competitive? A race to the bottom of weaker regulation or looser boardroom rules is not the answer. Scandals do not attract investor confidence; laws that set and enforce standards of integrity and openness in the markets and in corporate conduct, when voluntary efforts have failed, do. This was recognized in another era by American lawmakers who passed their equivalent of Sarbanes-Oxley legislation —it was actually much more revolutionary— which was aimed squarely at directors and CEOs. As the report of the House committee on Interstate and Foreign Commerce that accompanied passage of the Federal Securities Act of 1934 stated: “If it be said that the imposition of such responsibilities upon these persons will be to alter corporate organization and corporate practice in this country, such a result is only what your committee expects.” Some CEOs, directors and their spiritual advisors from Wall Street now complain that Sarbanes-Oxley is actually disturbing the status quo in the boardroom. Do you think? Maybe that’s the idea.

No, the answer to Dr. Greenspan & company’s concerns about American competiveness lie in a different direction. A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer. That’s the reality behind Sarbanes-Oxley legislation and other efforts to empower investors and bring common sense to the boardroom.

What’s not to see?