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Greenspan's Subprime Comment Fizzles as U.S. Lenders End Higher
By Michael Patterson
March 16 (Bloomberg) -- Alan Greenspan, whose comments on recession helped send stock prices reeling two weeks ago, predicted the subprime-mortgage debacle in the U.S. will worsen.
Shares of subprime lenders rose.
The former Federal Reserve chairman's influence on stock prices was thrown into question -- at least for one day -- as the Standard & Poor's 500 Index rallied after Bear Stearns Cos.' earnings report assuaged concerns that loan delinquencies will drag down profits at financial companies.
``It's definitely true that his influence is waning,'' said Hayes Miller, who helps oversee $38 billion at Baring Asset Management Inc. in Boston. ``He might be over-playing his position in the world, even as an ex Fed chief.''
Greenspan, who left the central bank in 2006 after 18 years as chairman, said today that he expects the fallout from subprime-mortgage defaults to spread to other parts of the economy, especially if home prices decline.
The market barely moved, while shares of homebuilders and banks rallied. The S&P 500 was at 1392.09 when Greenspan's comments were reported. After a drop, the index recovered to end the day at 1392.28.
Greenspan spoke today at a Futures Industry Association meeting in Boca Raton, Florida.
`Spillover'
``If prices go down, we will have problems -- problems in the sense of spillover to other areas,'' Greenspan said. While he hasn't seen such spreading yet, ``I expect to.''
Subprime borrowers, or those with poor or limited credit histories, are increasingly defaulting after looser lending standards allowed them to take on more debt than they could afford.
Bear Stearns said today that first-quarter profit rose 8 percent as higher revenue from trading derivatives and debt of troubled companies overcame a slowing market for home loans. Financial stocks rose 0.9 percent for the third-biggest gain among 10 industry groups.
Shares of subprime lenders climbed after General Electric Co.'s commercial-finance division agreed to buy PHH Corp. for $1.8 billion and then sell the company's mortgage unit to Blackstone Group LP.
PHH gained $3.29 to $31.10. Accredited Home Lenders Holding Co., a lender to people with poor credit, added $3.39 to $9.43.
Greenspan told a Hong Kong audience on Feb. 26 that a recession is possible by the end of the year and that slowing growth in profit margins was a sign that the economic expansion might be winding down, according to the Associated Press.
Global Rout
His comments came on the eve of a global equity rout that wiped out $3.3 trillion of stock market value.
A little more than a year after leaving the central bank, Greenspan is returning to economic forecasting, a role he enjoyed before entering government service in 1974, during the administration of President Gerald R. Ford.
In an interview with Bloomberg last week in Washington, Greenspan said he isn't trying to predict specific economic numbers: He's trying to capture the trend and when it might be about to change.
Some investors see different motives in the bearish remarks.
``Complicit is too strong a word, but this is a guy who presided over a bubble in the equity markets,'' said Charles White, who helps manage $1.8 billion at ThomasLloyd Asset Management in Pleasantville, New York. ``He was the provider of liquidity to the financial markets, and he took the risk out of people doing these trades.''
To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net .
Last Updated: March 16, 2007 00:02 EDT
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