FedSpeak

April 2010

"I Saw the Crisis Coming. Why Didn’t the Fed?

By MICHAEL J. BURRY
Cupertino, Calif.

ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. "Everybody missed it," he said, "academia, the Federal Reserve, all regulators."

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities."

This appeared as an Op Ed in the New York Times earlier this month and the author calls out former Fed Chairman Greenspan for being asleep at the wheel. He along with several other hedge fund firms (and broker dealers) were actively informing the world of their "contrarian" views. One of these views even emanating from one of Deutsche Banks own traders who was ridiculed with the nickname "chicken little (as in the sky is falling)."

As an investor, one should be listening to the herd (as in sheep), but more importantly, pay constant attention to the "nay sayers" in order to better understand the risk of what could go wrong. It is odd that Mr. Greenspan did not have an entourage that employed similar strategies.

Has anyone asked whether there have been changes to the process within the Fed?