Alan Greenspan, former chairman of the Federal Reserve, sprayed blame for the credit crisis on rating agencies, government-sponsored mortgage finance companies and lax law enforcement agencies yesterday in testimony to a commission of inquiry, but he admitted no specific mistakes himself.
He insisted the Fed had done what it could to warn of the dangers of sub-prime mortgage borrowing and an overheating US housing market, and that there was no substance to the claims that he inflated a bubble by keeping US interest rates too low for too long. Instead, he told the Financial Crisis Inquiry Commssion (FCIC) that they would find more answers by examining how the government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, bought up almost 40 per cent of all sub-prime mortgages issued in the mid-2000s.
And he rowed back on his own comments of 18 months ago, when he had told a Congressional panel that the credit crisis exposed a "flaw in the model I perceived is the critical functioning structure that defines how the world works".
In testy exchanges yesterday, Mr Greenspan said the "flaw" was in the financial models that Wall Street, regulators and the academic community had been using, which led to everyone underestimating the riskiness of mortgage investments.
"The flaw in the system that I acknowledged was an inability to fully understand risks... that were as yet untested. We didn't see what those risks were until they unwound at the end of the Lehman Brothers bankruptcy. We were under-capitalising the banking system for perhaps 40 or 50 years, and that has to be corrected."
Modelled on the bipartisan 9/11 Commission, the FCIC has been asked to report on 22 factors in the onset of the crisis, from fraud and due diligence failings to monetary policy and regulation. Recommendations are due on the President's desk by 15 December.
Mr Greenspan, the chairman of the Federal Reserve until 2006, had been one of the most public advocates of free market capitalism and reducing regulation, and his record has come under attack from critics who claim the Fed did not use its powers to clamp down on unscrupulous lending. Bad mortgages, particularly to sub-prime borrowers, were sliced and diced by Wall Street into credit derivatives that were sold across the world and which ultimately infected the entire financial system. The securities were often mistakenly labelled by credit rating agencies as super-safe.
The former chairman said yesterday that high demand for these securities was the most important aspect of the crisis. Fannie Mae and Freddie Mac, with a government mandate to promote home ownership, were big early buyers of sub-prime mortgages, he said, before demand from European banks kicked in.
Phil Angelides, the chairman of the FCIC, challenged Mr Greenspan's claims that the Fed had warned repeatedly about unscrupulous lending practices, and even issued guidance aimed at improving the information available about the quality of mortgages going into the Wall Street machine.
Guidance should have been followed up by the introduction of enforceable rules, Mr Angelides said. "You could have, you should have and you didn't." And he asked Mr Greenspan if this failure went into the category of "oops".
"When you have been in government for 21 years, the issue of retrospectively asking what you would have done differently is a futile activity," Mr Greenspan responded. "In the business I was in, I was right 70 per cent of the time, I was wrong 30 per cent of the time. There are an awful lot of mistakes in 21 years."Reuse content