WASHINGTON — Former Federal Reserve Chairman Alan Greenspan defended his legacy Wednesday, telling a special panel that's looking into the origins of the financial crisis that insufficient bank capital and poor business decisions brought the nation to the brink of ruin, and it wasn't his fault.
Greenspan's appearance before the congressionally created Financial Crisis Inquiry Commission was much anticipated and didn't disappoint. It included revelations that the Fed's own internal reviews had found insufficient policing of Citigroup, which taxpayers later rescued. A regulator whom Greenspan had silenced also grilled him mercilessly.
"The Fed utterly failed to prevent the financial crisis," Brooksley Born told Greenspan, after reeling off a litany of what she called failures by the central bank that helped bring about what Greenspan himself now labels the worst financial crisis ever.
Born was the chairman of the Commodity Futures Trading Commission in the late 1990s, and her unheeded warnings to Greenspan and other top Clinton administration officials came back to haunt the nation.
On Wednesday she tried in vain to get Greenspan to acknowledge that deregulating the markets in 2000 allowed for an explosion of complex insurance-like products called credit-default swaps, which helped spark the collapse and rescue of insurer American International Group.
Greenspan said those products weren't an issue at the time of deregulation, but Born reminded him that they became one of the principal causes of the financial meltdown in September 2008.
"Are you aware that the collapse of AIG was caused by its commitments under credit-default swaps that it had issued? The taxpayer has had to bail out AIG because of its exposure to credit-default swaps to the tune of more than $180 billion," she told Greenspan.
At the end of the bitter exchange, Greenspan told Born, "I really fundamentally disagree with your point of view."
He said the financial crisis occurred because regulators were unaware at the time that capital requirements — how much banks have to sock away to offset potential losses — were insufficient. Even this begrudging mea culpa from Greenspan, however, had a caveat. Regulators "were undercapitalizing the banking system for 40 or 50 years," he said, suggesting that the problem predated his 18-year tenure.
The other major cause, he said, was a breakdown at the originating point of mortgage finance, where lenders failed to know their clients, the borrowers, sufficiently. This can't be regulated, he suggested, but it's a fundamental part of doing business.
The explanation, however, misses the fact that regulators allowed popular no-documentation loans, in which a borrower who was willing to pay a quarter-point more on a lending rate could avoid having to document any income.
Commission Chairman Phil Angelides, a former California state treasurer, read Greenspan a long list of warnings from within the Fed about brewing problems in housing finance that were ignored.
"You could've, you should've and you didn't," he said.
Greenspan said the Fed couldn't be blamed for insufficient bank regulation since it didn't have supervisory powers over investment banks, which pooled millions of poorly underwritten loans for sale to investors. That responsibility fell to the Securities and Exchange Commission, which monitored the banks for investor protection but not for their safety and soundness, however, as it wasn't a bank regulator.
As to why the Fed's own inspectors within big banks failed to see problems, Greenspan said they relied on credit-rating agencies to determine the riskiness of complex securities backed by pools of U.S. mortgages.
Under questioning from Heather Murren, a former Merrill Lynch research analyst, Greenspan appeared surprised that two internal reviews by the Fed, obtained by the commission, were critical of how the Federal Reserve Bank of New York policed the risks taken by Citigroup and other Wall Street banks.
A so-called closeout report by the Fed in May 2005 found that "there are insufficient resources to conduct continuous supervisory activities in a consistent manner." A similar report in December 2009, after Greenspan was gone, concluded that the "supervision program for Citigroup has been less than effective" and cited "significant weaknesses in the execution of the supervisory program."
Greenspan seemed vexed.
"I've heard those things and I must say I don't recall a single instance where a request for funding for supervision and regulation was turned down by the (Federal Reserve) Board," he said. "I find this notion of inadequacy not verifiable."
He also disputed the idea that Wall Street banks with seats on the board of directors of the New York Fed have a conflict of interest.
"I personally have seen no evidence that members of the board ... had any influence on policy" other than giving advice, he said.
Much of Wednesday's hearing focused on subprime lending to the weakest borrowers and the growing exposure of quasi-government entities Fannie Mae and Freddie Mac to risks from these bad loans. Members disagreed about whether these entities were the cause of the housing crisis or simply the enablers.
On Thursday, the commission will hear from Chuck Prince, the former Citigroup CEO who famously explained Wall Street's inability to step back from the abyss by saying that as long as the music was playing he had to dance. Robert Rubin, who was a senior adviser and a board member at Citi before he became the economic face of the Clinton administration as treasury secretary, also will go before the commission. On Friday, the commission grills the former heads of Fannie Mae and Freddie Mac.
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Testimony from former subprime insider Richard Bitner
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