Greenspan Points Out Risks In Superfunds

In an exclusive interview with Emerging Markets, Greenspan said that the $75 billion so-called Master Liquidity Enhancement Conduit (MLEC) – proposed by Citigroup, Bank of America, JPMorgan and Wachovia to take on the assets of troubled investments – runs the risk of further undermining already brittle confidence in besieged markets.

“It’s not clear to me that the benefits exceed the risks,” Greenspan said. “The experiences I’ve had with that sort of intervention are two-sided.”

Greenspan drew a distinction between the bail-out of a single large hedge fund to prevent the widespread sell-off of assets – as happened with Long Term Capital Management (LTCM) in 1998 – and efforts to prop up an entire asset class, as in the case of the proposed superfund.

From Emerging Markets. The naked capitalist has a thorough, though complex analysis. The Street.com also has a quick analysis that is informative, although the conclusion should be regarded with some caution. But this section highlights the problem pretty clearly:

One thing the SMLEC won't do, and can't do, is resolve the problems of the millions of American who are suddenly finding they can't afford the rising monthly payments on their adjustable-rate mortgages. That's because, once a mortgage is repackaged as collateral for commercial paper or other kinds of securities, it's not possible to modify the terms. This limits the workout options for borrowers who run into trouble. - Source: http://economy-now.blogspot.com/