By Neil Irwin and Renae Merle
Thursday, April 8, 2010; A16
Former Federal Reserve chairman Alan Greenspan on Wednesday defended his stewardship of the U.S. economy in the run-up to the financial crisis, rebuffing accusations that regulatory and other failures by the Fed under his leadership were a major cause of the near-collapse of the financial system.
Testifying before the Financial Crisis Inquiry Commission, a bipartisan panel established to investigate the causes and lessons of the crisis, Greenspan conceded little in response to aggressive questioning from some committee members.
Listing a series of warnings about irresponsible mortgage lending in the late 1990s and early 2000s, Phil Angelides, the chairman of the committee, asked: "Very simply, Mr. Chairman, why, in the face of all that, did you not act to contain abusive, deceptive subprime lending? Why did you allow it to become such an infection in the marketplace?"
Greenspan responded by noting a string of actions that the Fed took in the late 1990s and early 2000s that were meant to prevent irresponsible mortgage lending.
"When you've been in government for 21 years, as I have been, the issue of retrospective and figuring out what you should have done differently is a really futile activity," Greenspan said, "because you can't, in fact, in the real world, do it.
"I was right 70 percent of the time. But I was wrong 30 percent of the time. And there were an awful lot of mistakes in 21 years."
Brooksley Born, the former head of the Commodity Futures Trading Commission who clashed with Greenspan in the 1990s over regulation of derivatives, lambasted her former adversary.
"The Fed utterly failed to prevent the financial crisis," said Born, one of 10 members of the crisis-inquiry panel. "The Fed and the banking regulators failed to prevent the housing bubble. They failed to prevent the predatory lending scandal. They failed to prevent our biggest banks and bank-holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts."
She continued: "They failed to recognize the systemic risk posed by an unregulated over-the-counter derivatives market, and they permitted the financial system and the economy to reach the brink of disaster. You also failed to prevent many of our banks from consolidating and growing into gigantic institutions that are now too big and/or too interconnected to fail. Didn't the Federal Reserve System fail to meet its responsibilities, fail to carry its mandates?"
Greenspan deflected her criticism, arguing that responsibility for those failures is broader than just the Fed under his leadership.
"I took an oath of office to support the laws of the land," Greenspan said. "I don't have the discretion to use my own ideology to affect my judgments as to what the Congress is requiring the Federal Reserve and others to do."
Even as Greenspan was dismissive of the idea that the Fed was in position to stop the housing bubble, there were new signs that current Fed leadership is inclined to take the rise of bubbles seriously.
The Fed should take a "proactive" stand in dealing with potential asset bubbles, William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech Wednesday. The central bank should act when the popping of those bubbles could risk a financial crisis, the government has tools that might work and officials are confident that the costs of using those tools are worth the benefits, Dudley said at the Economic Club of New York.
"Despite the fact that it is hard to discern bubbles, especially in their early stages, I conclude that uncertainty is not grounds for inaction," he said.
The financial crisis commission also heard from a former Citigroup executive, who told the panel he tried to warn higher-ups about the bank's business practices starting in 2006 and asked for an investigation. The warnings continued through 2007 and were issued in weekly reports, in e-mails and in meetings, Richard M. Bowen III said.
His warnings were not promptly heeded, he said. "I believed that these practices exposed Citi to substantial risk of loss," Bowen told the panel. Massive losses at the firm eventually led to a $45 billion investment by the federal government meant to prevent a collapse.
Bowen pointed to a November 2007 e-mail he sent to Robert Rubin, a former Treasury secretary, and three other members of Citigroup management. "The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization," the letter said.
In 2006, Bowen said, he discovered that 60 percent of the mortgages purchased and sold by Citigroup were defective. "We continued to purchase and sell to investors even larger volumes of mortgages through 2007," he said in his prepared testimony. "And defective mortgages increased during 2007 to over 80% of production."
Citigroup said in a statement that Bowen's warnings were "promptly and carefully reviewed when he raised them and corrective actions were taken."
"Unfortunately, our diligence practices did not detect what we now know to be the most significant downturn in the U.S. housing market for generations," Susan Mills, a managing director of Citigroup Global Markets, told the panel.