Greenspan refuses sackcloth and ashes
FORMER Federal Reserve Chairman Alan Greenspan yesterday defended his record before a panel investigating the roots of the financial crisis. He said his policy at the Fed of keeping interest rates low had not encouraged risky lending.
In opening testimony before the Financial Crisis Inquiry Commission on Capitol Hill in Washington, Mr Greenspan responded to critics who say the Fed failed to regulate risky lending to borrowers who could not afford to meet repayments.
Those loans became the toxic assets that sparked the crisis.
He said the Fed did not have the authority to regulate the non-bank lenders that issued most sub-prime mortgages.
The chairman of the panel, former California state treasurer Phil Angelides, said the Fed had issued guidance on predatory lending but had subsequently failed to regulate it.
He referred to internal Fed documents in which staff had recommended "broad prohibitions on deceptive lending".
"Why did you not act to contain abusive, deceptive sub-prime lending?" Mr Angelides asked Mr Greenspan.
Mr Greenspan pointed to a series of actions the Fed had taken, but Mr Angelides countered that these covered only 1pc of the lending market.
Mr Greenspan blamed other parties and historical events for the financial meltdown but accepted no responsibility for either himself or the Fed. He said excess saving in developing nations left too much money in the system and credit-rating agencies undercounted the risk of mortgage investments.
Mr Greenspan also claimed that the flames were fanned by demand from the government-backed mortgage giants Fannie Mae and Freddie Mac and that the government's policy of encouraging home ownership pushed Fannie and Freddie to create demand for risky loans.
Those companies played a critical role by buying up mortgage loans and packaging them into bonds that were then resold to global investors.
The 10 members of the bipartisan commission later will grill former and current executives of Citigroup Inc about that bank's role in financing and reselling mortgage investments.
The megabank was a major sub-prime lender through its subsidiary, CitiFinancial. Other divisions of Citigroup pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors.