NYT today: Greenspan Rejects Criticism of Policies at Hearing
By SEWELL CHAN and ERIC DASH
[KLP Note: Greenspan et al should just come out and say it: The Fed was just following the orders and laws written from Congress...]
WASHINGTON — The committee examining the causes of the financial crisis heard a strong defense of the Federal Reserve from its former chairman on Wednesday as the panel began three days of hearings 0n the failure to rein in Citigroup, Fannie Mae and the subprime mortgage market.
In his testimony, an unflinching Alan Greenspan fended off a barrage of questions about the Fed’s failure to crack down on subprime mortgages and other abusive lending practices during his lengthy tenure.
He pointed out that the Fed had warned about subprime lending and low-down-payment mortgages in 1999, and again in 2001. And he argued that if the Fed had tried to slow the housing market amid a “fairly broad consensus” about encouraging homeownership, “the Congress would have clamped down on us.”
He added: “There is a lot of amnesia that’s emerging, apparently.”
Mr. Greenspan’s testimony kicked off a day of hearings for the Financial Crisis Inquiry Commission, a bipartisan panel appointed by Congress to examine the mortgage meltdown and banking bailouts.
Also testifying is a former Citigroup mortgage lending officer who alerted his bosses about problems tied to the bank’s underwriting practices and several former senior Citi executives who presided over decisions contributing to the bank’s collapse.
But Wednesday morning was devoted to Mr. Greenspan, who briefly testified in the dark after the lights went off. (Staff members opened the windows to allow sunlight.)
A particularly sharp exchange occurred between Mr. Greenspan and Brooksley E. Born, a panelist and former regulator who clashed with Mr. Greenspan and members of the Clinton administration over derivatives regulation — and lost that battle. In tough questioning on Wednesday, Ms. Born called on Mr. Greenspan to defend his longtime deregulatory bent.
“The Fed utterly failed to prevent the financial crisis,” she said. “The Fed and other banking regulators failed to prevent the housing bubble, they failed to prevent the predatory lending scandal, they failed to prevent our biggest banks and holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts.”
Mr. Greenspan replied that there was a failure: an underestimation of the “state and extent” of financial risks and the ability of private counterparties to assess them.
“The notion that somehow my views on regulation were predominant and effective at influencing the Congress is something you may have perceived,” he said. “But it didn’t look that way from my point of view.”
He also said the banking system had been undercapitalized for 40 to 50 years, and echoing his remarks in a recent Brookings Institution speech, noted that the only meaningful way to lessen the impact of future crises was to require banks to hold more capital, and all financial traders to hold more collateral.
Following Mr. Greenspan, several executives from Citigroup, are expected to testify about the bank’s risk management and lending practices. Its mortgage-related losses were so deep that the government stepped in with more than $45 billion of taxpayer money, including a 27 percent ownership stake.
Several witnesses explained how Citigroup and other big banks originated subprime mortgages, made loans to independent subprime mortgage companies and bought a huge number of subprime mortgages that it packaged into complex securities known as collateralized debt obligations. All acknowledged a sharp deterioration in lending standards that kept the housing market aloft and Wall Street’s loan-packaging machines humming.
But the most pointed remarks came from a former Citigroup lending officer testified that he tried to blow the whistle on some of the bank’s lax practices. He recounted how lending decisions were changed from “turndown to approved” and suggested that 60 to 80 percent of the loans that Citigroup sold to Fannie Mae, Ginnie Mae, and other investors were defective.
“I witnessed business risk practices that made a mockery of Citi’s credit risk policies,” he told the panel. Starting in 2006, he said he repeatedly warned his bosses about the violations and requested a special investigation from management. Ultimately, in November 2007, he sent a detailed e-mail meomorandum to Robert E. Rubin, an influential Citi executive and board member, and the bank’s audit, finance and risk chiefs alerting them to “the breakdowns in processes and internal controls.”
Mr. Bowen, under friendly questioning, said that a bank lawyer contacted him a few days after he sent the e-mail memo but then did not hold an in-depth discussion with him until January 2008. He said he did not know if Citi followed up on his concerns because he was “not there physically ” and officially left a year later — a statement which he did not elaborate.
Without specifying a timetable, a Citigroup spokeswoman said the issues raised by Mr. Bowen were promptly and carefully reviewed when he raised them and corrective actions were taken.
In a later session, the commission plans to call four other Citigroup executives to discuss how it managed to write off some $45 billion of complex mortgage bonds it had deemed supersafe. The huge losses forced the government to step in with bailouts to prevent the bank’s collapse.
In their testimony, the four executives insisted that they vastly underestimated the magnitude of the financial storm and failed to appreciate the risks of holding such a large portfolio of mortgage-related investments. So-called “super-senior C.D.O.’s” were held out to be supersafe, they asserted.
Those beliefs were reinforced by credit rating agencies and the bank’s own stress tests and risk models, which failed to capture a severe nationwide decline in housing.
“No one, including myself, ever conceived we would see real estate prices plunge 30 to 40 percent, with homeowners walking away from homes en masse for the first time ever,” Thomas Maheras, the former co-head of Citi’s investment bank who oversaw its mortgage activities, said in a prepared statement.
He expressed “regret” that he nor his colleagues did not see the housing crisis coming.
David C. Bushnell, Citigroup’s former chief risk officer, was less contrite in his prepared remarks, which stopped short well short of a personal apology. In his testimony, Mr. Bushnell pointed out that other market participants and regulators made similar errors and he called it a “rational, but in retrospect, mistaken business judgment” to keep such a big position.
Three other former Citigroup executives were also expected to address the commission: Nestor Dominguez , the former head of Citi’s C.D.O. group; Murray Barnes, the risk officer directly responsible for the C.D.O. unit; and Susan Mills, the head of the mortgage finance group in Citi’s investment bank.
None of the Citigroup executives addressed in their prepared statements how compensation influenced their judgment. Nor do they acknowledge that around the same time, a handful of investment banks, like Goldman Sachs, and several savvy investors ratcheted down their mortgage exposures.
Two additional Citigroup officials are scheduled to testify on Thursday. Charles O. Prince III, the former chief executive who presided over the losses, will be questioned alongside Mr. Rubin, an influential adviser and a former Treasury secretary.
Sewell Chan reported from Washington, and Eric Dash from New York.
nytimes.com |
