Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (54 page)

Alan Greenspan’s Hometown

New York is at the pinnacle of America’s financial economy. When Alan Greenspan entered New York University, New York was an industrial center. When he joined William Townsend, it was a headquarters town, the center for marketing and selling. In 1960, developer William Zeckendorf understood how New York had changed: “Precisely because New York is a national headquarters, it is also a middle-income as well as high-income town.”
¹⁹
To Zeckendorf, New York was “an unparalleled consumer’s market.”
²⁰

¹⁵
“Two Block Fronts Sold on West Side,”
New York Times
, July 14, 1940. The original investment for land and building was $16,500,000. The sale price is ambiguous in this article; it looks as if it was between $7.4 million and $9.8 million.

¹⁶
Sharon L. Crenson, “Pandit Buys Tony Randall’s Co-op for $17.9 Million,” Bloomberg, September 26, 2007.
¹⁷
Allen Salkin, “Among the Rich and Famous . . .,”
New York Times
, May 15, 2007.
¹⁸
Elmer Davis,
New Republic
, 1932, quoted in Stern, Gilmartin, and Mellins,
New York 1930
, p. 603.
¹⁹
Robert A. M. Stern, Thomas Mellins, and David Fishman,
New York 1960: Architecture and Urbanism between the Second World War and the Bicentennial
(New York: Monacelli Press, 1995), p. 29.

The United States was consuming more than it was making. This imbalance needed to be financed. Alan Greenspan worked in the city that produced the finance. Greenspan profited. By the late 1960s, he was a millionaire and lived in a fashionable New York apartment house.

Alan Greenspan was born for the times. The excesses required a spokesman who could talk nonsense with a straight face. He could tell Americans that they were rich when they were really poor. Americans believed him and kept spending. Greenspan was awarded a doctrine after he adopted Friedman’s and Bernanke’s interpretation of the Great Depression. Americans revered Greenspan, to a large degree because their lives had gone haywire from distortions that only economists could explain, and Alan Greenspan was the world’s most famous economist.

He was a celebrity. In today’s culture, that meant he could say anything. Finance kept borrowing and leveraging, believing (or pretending to believe) that its fortunes would continually compound. Fifty years, or maybe a hundred years, of accumulating imbalances—of finances and beliefs—have reached their logical conclusion in New York City. We are unlikely to see its kind for a long while.

You’re the Top!

A walk around town is a testament to the man who turned the country into a leveraged carry trade (see Chapter 10). Many people on Wall Street cashed in, even if the banks they ran were struggling for survival. Robert Rubin collected $150 million from Citicorp in the decade after he left the Treasury Department.
²¹
Yet, until the bubble burst he had “no familirity at all with CDOs”
²²
Citicorp had received $45 billion from the federal government when Rubin left. Goldman Sachs’s CEO Lloyd Blankfein received a $68 million bonus in 2007, before his firm needed the protection of the Federal Reserve in 2008.
²³
Between 2000 and when it failed in 2008, Lehman Brothers’ CEO Richard Fuld received $484 million in salary, bonuses, and stock options.
²⁴

²¹
Josh Fineman, “Rubin’s Career at Citigroup Ends after $20 Billion of Losses,” Bloomberg, January 10, 2009.
²²
Grant’s Interest Rate Observer, February 22, 2008, p. 1, quoting article in
Fortune
magazine.
²³
Miles Weiss, “Goldman Change to Bonuses Helped Cut Compensation Costs in 2008,” Bloomberg, March 13, 2009.

William Zeckendorf ’s prediction has come true, except for one misestimation: it is no longer a middle-income town. In Manhattan, 51 percent of neighborhoods are identified as high income and 40 percent as low income.
²⁵
In 2006, New York investment bankers were paid a weekly wage of $16,849 a week; the average weekly pay for all private-sector jobs was $841 (not necessarily in New York).
²⁶

Inflation has priced out the middle class. By 2005, 57 percent of Manhattan residents over the age of 25 were college graduates; 25 percent held graduate degrees.
²⁷
The majority of adults in Brooklyn, Bronx, and Queens did not speak English as their first language.
²⁸

“Forty is the new thirty,” noted Richard Coraine, of the rising price of entrees, including the 1¾-ounce lunchtime lobster appetizer ($42) at the Modern, his restaurant in New York.
²⁹
Shopping in New York City was beyond the reach of more Americans. Stores started to accept euros and other foreign currency as payment for merchandise.
³⁰

Manhattan is structured for the rich. Whole Foods opened a 71,000-square-foot supermarket at Columbus Circle, on the upper West Side.
³¹
Yet, there are one-third fewer supermarkets in the five boroughs than there were six years ago.
³²
Retail space rose to $500 a square foot on the Upper East Side; restaurants and groceries abandoned the space amidst “the Big Bank-Leasing Madness.” According to the
New York Post
, “[o]nce lively shopping stretches.… now resemble banking malls.”
³³

²⁴
Brian Ross and Alice Gomstyn, “Lehman Brothers Boss Defends $484 Million in Salary, Bonus,”
ABC News
, October 6, 2008.
²⁵
Sam Roberts, “Study Shows a Dwindling Middle Class,”
New York Times
, June 26, 2006.
²⁶
David Cay Johnston, “Pay at Investment Banks Eclipse All Private Jobs,”
New York Times
, September 1, 2007.
²⁷
Patrick McGeehan, “New York Area Is a Magnet for Graduates,”
New York Times
, August 16, 2006.
²⁸
www.city-data.com/top2/his.html.
²⁹
Jodi Kantor, “Entrees Reach $40, and, Sorry, the Sides Are Extra,”
New York Times
, October 21, 2006.
³⁰
Angela Moore and Bill Berkrot, “‘Euros Accepted’ Signs Pop Up in New York City,” Reuters, February 6, 2008.
³¹
Robin Shulman, “Groceries Grow Elusive for Many in New York City,”
Washington Post
, February 19, 2008.

Noteworthy apartment buildings continued to rise in 2008. They were built on CDOs. New York is more dependent than ever on the financial industry. Between 2000 and 2007, tax revenue rose 41 percent.
³⁴
In 2006, the top 1 percent of taxpayers paid nearly 48 percent of the city’s personal income tax, compared to 34 percent two decades ago.
³⁵
Finance occupied an ever-growing percentage of Manhattan office space, and Fifth Avenue shops paid the most expensive retail rents in the world, double the cost of five years before.
³⁶

Apartment prices were still rising in 2008. Gregory Heym, from Terra Holdings LLC, explained: “At the high end of the market, you are dealing with wealth and not income. People buy apartments with cash.”
³⁷

William Zeckendorf III (the visionary’s grandson) has built the finest apartment house since the early 1930s: 15 Central Park West. Designed by esteemed architect Robert A. M. Stern, its twin 41-story towers cast silhouettes a few blocks south of the San Remo. Zeckendorf paid $400 million for the land. There was a lot of headshaking at this folly. He sold the apartments before completion. Financially, it is “the most successful apartment building in the history of New York.”
³⁸

Lloyd Blankfein, chairman of Goldman Sachs, is a resident. Sandy Weill, former chairman of Citigroup, paid $42 million for a penthouse.
The apartments are laid out “almost exactly like classic apartments from the 20s, with semi-private elevator halls, large entry foyers, formal dining rooms and libraries.” There is a waiting room for chauffeurs, 80 wine cellars, and maids’ apartments, sold separately.
³⁹
At 15 Central Park West, inflation has now hit the top. This is the history of inflation: it moves, from the bottom and doesn’t stop until it consumes the top. One of the apartments, sold by the Zeckendorfs for $21.9 million, went on the market for $80 million. Another was offered for $90 million, and a third for $150 million.
⁴⁰
Paper money is in abundance, CDOs are worthless, the skills honed to create and sell derivatives are sitting in Bryant Park drinking café lattes. In the estimation of architectural critic Paul Goldberger: “No one knows, of course, whether the speculative frenzy at 15 Central Park West will hold. But since the building was created to support the fantasy of living in the 20s or 30s, it’s no big deal to pretend also that it’s 2005, when prices were still soaring. At 15 Central Park West it’s still 2005—unless, that is, it’s really 1929.”
⁴¹

³³
Steve Cuozzo, “Prime Neighborhoods Overrun by Big Bank-Leasing Madness,”
New York Post
, January 2, 2007.
³⁴
Nicole Gelinas, “New York’s Next Fiscal Crisis,”
City Journal
, Summer 2008.
³⁵
Ibid. The 2006 figure is “even after adjusting for the temporarily higher tax rate.”
³⁶
Cushman & Wakefield, “1Q Report Shows Manhattan Office Rents Are On the Rise,” news release, April 4, 2006.
³⁷
Sharon L. Crenson, “Rotating Rooms, Yacht Berths Spur Dubai, Moscow Apartment Boom,” Bloomberg, April 25, 2007.
³⁸
Paul Goldberger, “Past Perfect: Retro Opulence on Central Park West,”
New Yorker
, August 27, 2007.
³⁹
Goldberger, “The King of Central Park West,”
Varity Fair
, September 2008.

The Bottom

Some of the rich must think it is 1930. Protestors have marched in front of 740 Park Avenue—not because Steven Schwartzman is in the penthouse, but because Henry Kravis also lives in the building.
⁴²
In Greenwich, “For Sale” signs are illegal. If they were allowed, the
New Yorker
suspects that Greenwich might look like “a giant and very expensive tag sale.”
⁴³

The lower 99 percent have made many mistakes of their own. The cry for “growth” since the 1950s has taken mutant forms. Maricopa, Arizona, is an example. A 40-mile commute from Phoenix, it had a population of 600 in the early 1990s. “[By] 2005, three new people moved to Maricopa each hour.”
⁴⁴
More than one-third of the mortgages were subprime. In June 2009, 1,042 houses were in foreclosure and up for auction at $172. (That is not a misprint.)
⁴⁵

Phoenix, Arizona, is a case in point. It is a city in the middle of the desert. The population has grown from 100,000 in 1950 to nearly 3,000,000 today. The temperature in Phoenix at night is now 12 degrees hotter than in surrounding rural areas.
⁴⁶
There are days when Phoenix uses more energy than New York City.
⁴⁷

⁴⁰
Ibid.
⁴¹
Ibid.
⁴²
Andrew Ross Sorkin, “Henry Kravis in Focus as Buyout Backlash Spreads,”
New York Times
, December 6, 2007.
⁴³
Nick Paumgarten, “A Greenwich of the Mind,”
New Yorker
, August 25, 2008.
⁴⁴
Sanartha M. Shapiro, “The Boontown Mirage,”
New York Times
, April 6, 2008.
⁴⁵
At least, according to foreclosures.roost.com. on June 23, 2009: “There are 1042 homes that are up for auction at an average auction price of $172.”

David Rosenberg, then Merrill Lynch’s chief North American economist, observed, “[T]he bottom line is that all those McMansions [the 4,000 or 5,000-square-foot houses] that were bought during this housing boom are going to go the way of the 1973 Lincoln Continental.” Rosenberg went on to say the “housing bubble was the most overowned, overleveraged and oversupplied real-estate market ever and its unwinding will take years.”
⁴⁸

The McMansions are and will continue to draw energy like a 1973
Lincoln Continental. The average new house had grown from 1,500
square feet in 1970 to nearly 2,400 square feet in 2004; 90 percent of new houses in 2004 were equipped with central air conditioning.
⁴⁹
The houses were getting bigger, but they were not big enough. Rentable selfstorage space has risen by 740 percent since 1985, with over 20 square feet of storage space per U.S. household.
⁵⁰
To carry all the stuff, cars grew: the average weight of a passenger vehicle increased from 3,236 pounds in 1996 to 4,021 pounds in 2003.
⁵¹
It was not only stuff that needed more room, Americans grew. In 2006, the obesity rate of 16-year-old boys in the United States was the highest in the world; American girls had to settle for second place, behind overweight Cypriots.
⁵²

The Great Impoverishment

Many Americans need to diet, but many others are being starved, thanks to the Federal Reserve. This failed institution deserves blame for “the Great Impoverishment.” Monetary policy has operated like a jackhammer opening a pickle jar. Over the past two decades, the Fed funds rate was cut from 9 percent to 3 percent, raised from 3 percent to 6.5 percent, cut from 6.5 percent to 1 percent, raised from 1 percent to 5.25 percent, and (most recently) cut from 5.25 percent to zero. This was Federal Reserve Chairman Ben S. Bernanke’s “Great Moderation.”
A History of Interest Rates
, which catalogs interest rates since Mesopotamian times, shows no such precedent except in times of hyperinflation, total war, and social disintegration.
⁵³

⁴⁶
Patricia Gober,
Metropolitan Phoenix: Place Making and Community Building in the Desert
(Philadelphia: University of Pennsylvania Press, 2005), pp. 50–51.
⁴⁷
Dan Roberts, “Phoenix Gives Its Newcomers the American Dream They Can Afford,”
Financial Times
, September 28, 2005.
⁴⁸
James Quinn, “Green Ashes and Black Swans—The Alan Greenspan Legacy, Part II,”
The Cutting Edge
, September 29, 2008.
⁴⁹
U.S. Census Bureau, C-25 and Characteristics of New Housing.
⁵⁰
Self Storage Association Fact Sheet; www.selfstorage.org.
⁵¹
Joshua T. Johnson, Motor Vehicles, Appendix N, Table 3, Weight of material in a typical family vehicle, 1978 to 1996.
⁵²
Economist Handbook of Facts and Numbers, 2009
. Profile Books Ltd., 2008.