Wharton professor analyzes the crisis

He became a celebrity during the Clinton boom years for his book preaching the glories of long-term investment in stocks. His analysis became so persuasive, in fact, that his opinions moved share prices up or down within minutes.

Today, Jeremy J. Siegel finds himself playing the role of Monday Morning Quarterback as he, like so many other free-market cheerleaders, tries to make sense of the Wall Street bloodbath that has soaked stock portfolios during the last month and drawn comparisons to the years leading up to the Great Depression.

Siegel, 62, a finance professor at the Wharton School of the University of Pennsylvania, recently gave a two-hour lecture about the stock market and the economy to 39 business journalists from around the globe.

His punditry spanned topics such as Treasury Secretary Henry M. Paulson Jr.'s handling of the congressional bailout plan and possible ways to stimulate the economy before things get much worse.

On Paulson and the government bailout, known as the Troubled Asset Relief Program, or TARP:

"I could scarcely think of a more horrible way to introduce it than the way that Hank Paulson did. When people ask me what about the TARP, I say it's a B-plus program but I'm going to give him an F for marketing the program. An F-minus. We don't have F-minus at Wharton. It couldn't be worse. It's embarrassing how bad he was. And as a Treasury secretary he goes from about an A-minus to about a C-minus. He'll never live down how badly he did that."

On whether corporate greed, ill-advised homeownership policies or shark-like traders are to blame for bringing down financial institutions that invested heavily in mortgage-backed securities:

"All that is bunk, by the way. Had almost nothing to do with what happened. . . .

"Basically one reason: Because these firms leveraged themselves and bought and insured risky mortgage-related assets that they thought were good investments - and completely underestimated the risk of these investments."

Siegel said employees looking to boost revenue at their otherwise profitable global financial firms "took the house money" and acted like gamblers. "I'm going to place it on Number 14 on the roulette table. Almost that's what they did. . . . No one was in control and no one understood what was going on."

On criticism that former Federal Reserve Chairman Alan Greenspan fed demand for mortgage-backed securities after 9/11 by reducing interest rates to 1 percent for the first time since the 1950s:

Siegel said interest rates were low across the world during that period. As a result, investors went looking for higher-yield investments. Greenspan was not the only reason rates dropped.

But he said Greenspan was not blameless, now that it has become clear how risky mortgage-backed securities truly were and how quickly they depreciated in value when the housing market began to deflate, causing huge asset losses for financial companies.

"The blame on Greenspan is because he had no idea this was coming. . . . He's the Fed. He has access to the balance sheets of all these firms and could have seen that this could have led to something."

Now that it has all come crashing down:

"Who's the bad guy? Who's the good guy?"

Someone in audience shouted, jokingly: "The MBAs!"

"The MBAs?" Siegel said back with a smile. "They should have taken my macro class?"

Great Depression parallels:

Siegel said that in the years leading to the Great Depression, stock investors were over-leveraged and hoping the market would keep rising. Interest rates were low then, too, feeding the desire for higher stock returns over safer investments.

"The Fed back then, like recently, was criticized for supplying too much credit and causing the boom and the bull market unjustifiably."

But before engineering a bailout, the leader of the Fed died in 1929. Those in need of bailout would suffer the consequences of their actions.

"And the Great Depression was ushered in."

On the bailout plan injecting cash into banks - but with no requirement that the banks use that cash to issue business and consumer loans:

Siegel said troubled financial institutions may be too scared to take on any more loans. Even though spending the cash could stimulate the economy, banks may hoard instead.

"When you see Lehman Brothers go down, who are you going to trust out there? Joe's Restaurant?"

On whether Paulson and Fed Chairman Ben S. Bernanke have surrounded themselves with solid economic advisers:

"Two months ago I was called by the White House. They wanted me to be a Fed governor."

Siegel said he would have been nominated to replace Fred Mishkin, who left during the summer. Siegel said he declined, given the buzz that Congress would act on no new appointments until after the presidential election.

"So I said, 'Look, we'll see what happens in January.' I just didn't see any future to it now."

Would he be keen to accept a nomination come January?

"I might. I hope [the crisis] is solved by then, that the critical aspects of this are moved forward."

Age: 62.

Occupation: Professor of Finance, Wharton School of the University of Pennsylvania. Author and paid consultant.

Home town: Philadelphia.

Grew Up In: Highland Park, Ill., a suburb of Chicago.

Education: Ph.D., Massachusetts Institute of Technology; B.A., Columbia U.

Book That Made Him a Financial-World Celebrity: Stocks for the Long Run: The Definitive Guide to Market Returns and Long-Term Investment Strategies.

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When Jeremy J. Siegel said Internet stocks would collapse, they did - in 1999. Read what this Wharton guru had to say back then as he talked about himself and his influence. http://go.philly.com/siegelEndText