Greenspan "Bears" Down on Securitization Products

The Financial Times published a story over the weekend wherein former Federal Reserve chairman Alan Greenspan compared the ABS market to "cocaine", said the ABCP liquidity crisis was a "savings and loan disaster waiting to happen" and that CDOs will never again see the pricing and structures they once enjoyed. Leading up to the release of his memoirs today, "The Age of Turbulence", Greenspan sat for an interview with the newspaper and discussed the current U.S. housing market, which Greenspan has described as "frothy". His most strongly worded terms, however, were reserved for the various sectors of the ABS markets that have been in uproar since February. Risk prices had fallen to unsustainably low levels beforehand, and investors had been addicted to higher-yielding asset-backed securities markets as if they were "cocaine", the newspaper said. The demand in products induced the increase in origination of subprime mortgages via broker networks. As for the ABCP market, Greenspan decried the mismatch between the durations of liabilities and assets of these vehicles, saying that ultimately, ABCP issuance was "probably not going t o get back to where it was." CDOs "will never get back to the levels and structures that they were, because now everybody knows you cannot price them," the newspaper wrote. Greenspan did manage to make encouraging comments about one aspect of the capital markets. Credit default swaps, he said had successfully demonstrated their ability to diversify risk and that that product would continue. Yet, in innovative financial markets, he said "there will always be products that fail.