Bank-led 'super fund' risks may exceed benefits, says Greenspan

WASHINGTON (Thomson Financial) - Former Federal Reserve chairman Alan Greenspan has warned that the recently announced Master Liquidity Enhancement Conduit fund, or M-LEC, may not provide the hoped for benefits.


The fund, devised by Citigroup Inc, JPMorgan Chase & Co and Bank of America Corp, is designed to spread out balance sheet losses over time and prevent dramatic swings in asset valuations that could unbalance financial markets.


The banks hope the creation of the M-LEC will prevent turmoil in mortgage-backed securities from further spilling into other parts of the credit market.


But Greenspan said in an interview with Emerging Markets magazine that "it's not clear to me that the benefits exceed the risks."


"The experiences I've had with that sort of intervention are two-sided," he said.


It could make conditions affecting investor psychology adverse because "if you believe some sort of artificial non-market force is propping up the market you don't believe the market price has exhausted itself," he told the magazine.


"What creates strong markets is a belief in the investment community that everybody has been scared out of the market, pressed prices too low and they're wildly attractive bargaining prices there.


"If you intervene in the system, the vultures stay away. The vultures sometimes are very useful," he said.