Greenspan Says He Failed to See Mortgage Danger, according to the AP. And Felix Salmon comments "There's a lot of Greenspan revisionism going on right now, with people changing their minds and deciding that the Maestro wasn't nearly as good as they thought he was. They're right, and not only because no one could have been as good as they thought he was..." and goes on to discuss the importance of confidence (rather than ability) in the central banking business.

On the same theme - Northern Rock, one of Britain's largest mortgage lenders, is the subject of a real old-fashioned panic. Its shares are down 25% after it revealed it had borrowed from the Bank of England (at penal rates) and today its online banking website crashed from the traffic overload. Safe to say all those browsers weren't converging in order to make deposits.

Most puzzling comment, about US subprime: "We don't know where the poison went from all these bad loans and you have to look at all these bad loans as a bit like a blancmange that's been hit very heavily by a spade and it's gone everywhere.They turn up in all sorts of strange funds and therefore we don't know who's got the losses." Blancmange notwithstanding, I would have thought it was fairly safe to say that a large UK lender is unlikely to be dabbling in CDOs based on US subprime. SIVs, apparently, yes...

Salmon (again) reckons that the lender overstretched earlier this year, taking advantage of the fact that everyone else was becoming more wary of low-quality loans.

More on the bank run issue - James Hamilton expands his Jackson Hole speech on the non-bank bank run.

Alan Greenspan warns that the credit crisis is a post-bubble panic along the lines of 1998 (LTCM), 1987 (stock markets), 1907 (bank panic) and 1837 (US land bubble). Sounding almost Machiavellian, he adds: "the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria".

Anatole Kaletsky points out that, if you've just come back from holiday, it doesn't look that bad:

At Tuesday’s closing prices, you would have seen that the FTSE 100 index, representing the 100 biggest shares on the London stock market, was at 6,377, almost identical to its closing level of 6,360 of July 31. All other leading stock markets, apart from Tokyo, have performed at least as well.

Does this mean that all the lurid stories about a global financial crisis were just a silly season exercise in trying to sell extra papers, and all the thundering speeches from politicians and regulators denouncing government bailouts of reckless borrowers and lenders were simply a waste of breath? The answer, as all too often in the world of economics and finance, is yes and no.

He adds, however, that we are starting to see that not all AAAs are equal - a point already made by Moody's president Brian Clarkson:

" We're rating with the goal that if you purchased all triple-As, they would all perform the same. Now of course they don't. Some get downgraded, some get paid off.
"But what we're doing is we're actually rating to a target. We're targeting everything to be money good at the end with very, very little variability at the triple-A level," he said.
Inherent in structured finance, however, are rules that govern what can and cannot be done -- even moves to save deals that break down, whereas a company can sell assets or otherwise reduce debt to stave off problems.
"There is little you can do once things start to go bad," Clarkson said. "Structured finance ratings tend to be more stable over a longer period of time than a fundamental rating. But when they actually move, they move much quicker."

Maybe it's time for rating agencies to make that clear, then - obviously it would have been better to know that, in terms of the topography of its rating space, a AAA CDO tranche was sitting on a much more precipitous landscape than an AAA sovereign bond. A point also made here - "Credit derivatives awarded the top ratings by Moody's Investors Service and Standard & Poor's may be as vulnerable to default as high-risk, high-yield bonds, according to independent research firm CreditSights Inc."

... at least, not if he's Danish. Directors, on the other hand, are fair game.
This paper from the Japanese Institute for Economic Research examines the question:

What do managers do? Do managers meaningfully affect firm decision’ making
and performance?

The authors conclude: "Overall, manager-death shocks provide direct evidence that CEOs (but not board members) are extremely important for firm performance. Family-death results demonstrate there is a strong overlap between the personal lives and the professional roles that CEOs play, and they provide further evidence that current CEOs are extremely important for firms’ prospects.
While we cannot provide a direct test for whether our results reveal that CEOs add economic value in an ex-ante sense, we do show that the CEOs’ permanent or temporary absence is material for firm performance, ex-post."

One economics blogger suggests that there are other possible mechanisms: perhaps good bosses are more likely than average to die (stress-related illnesses such as heart failure, perhaps) skewing the data set. The study's author dismisses this in comments, but I'm not sure he's justified in doing so. Is there actually research showing that above-average CEOs have the same life expectancy as the rest? After all, a lot of diseases could be exacerbated by stress. On the other hand, perhaps it's more stressful to be the head of a failing company.

The author also adds an intriguing suggestion: "Maybe the CEO centralizes power and makes himself indispensable by not delegating anything. Acoording to this story, he does not need to have any value (ex ante) when he is hired, however when he dies he has monopolized all information and decision power. That would generate that the firm loses when he dies even though that he is not really adding any value." See the next version of the paper for details.

(via FT) Axel Weber, head of the Bundesbank, believes that the credit crisis is a classic bank run - a runaway crisis of confidence. And reiterates: "What we are seeing at the moment is a total overreaction,” he said. “There is no overall problem in terms of solvency – it is one of liquidity."

Meanwhile, Morgan Stanley is apparently going into the casino business. Sorry, it's opening a retail-oriented marketplace in event futures. No, actually, it's a casino.

And a thought-provoking story on the Bear Stearns hedge funds - in 2005, according to this report, they had dropped the investment limit to $250,000, attracting a good many less-sophisticated retail investors.

I would never have guessed that anyone using the phrase "preservation of principal" would be thinking of hedge funds as the vehicle of choice.

I have a question. Mr. Greene thought 1% a month didn't sound that unreasonable. By my back-of-the-envelope calculations that's 12% a year. From securities backed by home mortgages.

I conclude that Mr. Greene must hang out a lot with people who regularly pay 12% mortgage rates. This gave him the mistaken impression that the return on CDOs has something to do with just passing through interest payments, and not outrageous levels of gearing and risk concentrations.