Alan Greenspan yesterday raised serious doubts over the plan to create a $75 billion-plus (€52.6 billion) investment fund to buy the assets of troubled investment vehicles, warning it could prevent the market from establishing true clearing prices for asset-backed securities.
The former chairman of the Federal Reserve said the "super- fund" proposal by Citigroup, Bank of America and JP Morgan Chase - with the backing of the US Treasury - could undermine confidence in credit markets.
Mr Greenspan told Emerging Markets magazine: "It is not clear to me that the benefits exceed the risks." He added: "The experiences I have had with that sort of intervention are two-sided."
Mr Greenspan's remarks appeared as worries about the possibility of a US economic slowdown pushed stock prices lower. At midday in New York, the S&P 500 was down 2.6 per cent for the week, the worst showing since the index fell 4.9 per cent in the week ending July 27th. The Eurofirst 300 fell 0.6 per cent for the day.
Fears about the credit worthiness of US companies also arose during the week. The difference in yields on investment-grade corporate bonds and US Treasuries rose 13 basis points to 2.11 percentage points, according to Merrill Lynch, the biggest increase since late July.
Mr Greenspan said he worried the superfund could have an "adverse" impact on market sentiment by leading investors to believe that "some form of artificial non-market force" was propping up prices. He said the plan could stop market forces from pushing prices low enough to entice genuine buyers.
"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 there are wildly attractive bargaining prices out there," Mr Greenspan said.
The former Fed chief added that "if you intervene in the system, the vultures stay away. The vultures are sometimes very useful."
Mr Greenspan's views are shared by some of the world's most successful investors. Warren Buffett told Fox Business Network that "pooling a bunch of mortgages, changing the ownership" would not change the viability of the mortgage instrument itself.
"It would be better to have them on the balance sheets so everyone would know what's going on," he said.
Bill Gross, chief investment officer of Pimco, the giant bond fund manager, has called the superfund idea "pretty lame".
Ben Bernanke, the Fed chairman, and his colleagues have not offered public comments on the master conduit plan.
At press time, Treasury was unable to comment on Mr Greenspan's remarks.
