Greenspan Admits Errors, “Shocked Disbelief”

A hearing Thursday on Capitol Hill provided the latest forum for lawmakers to probe the causes of the nation’s financial crisis, with the Committee on Government Oversight and Reform holding its second hearing in two days on the issue — Thursday’s hearing centered on regulatory policy and failings, and included testimony from former Federal Reserve chief Alan Greenspan, as well as Securities and Exchange Commission chairman Christopher Cox. All were grilled harshly by legislators, who have largely come to blame lax regulation for enabling the sort of financial choices that have put the U.S. economy into its most precarious position in decades. “For too long, the prevailing attitude in Washington has been that the market always knows best,” committee chairman Henry Waxman said in his opening remarks, putting the blame on former Fed chairman Alan Greenspan and the SEC, among others. “The Federal Reserve had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market,” Waxman argued. “But its longtime chairman, Alan Greenspan, rejected pleas that he intervene.” For his part, Greenspan surprisingly admitted mistakes, and said his thinking had evolved in response to the crisis. “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief,” he said in his remarks. “Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.” In part, Greenspan said that selling off residual interests from mortgage-backed and other securitizations into CDOs was a key culprit of the mispricing of market risk. “As much as I would prefer it otherwise, in this financial environment I see no choice by to require that all securitizers retain a meaningful part of the securities they issue,” he said. The former Fed chairman even pulled an abrupt about face relative to his own legacy of deregulation, and suggested that regulatory and policy responses would be critical to restoring market stability. “The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago,” he predicted. The New York Post on Friday ran blaring headlines suggesting that Greenspan’s testimony had “wrecked his legacy” by admitting he was wrong — but other sources that spoke with us suggested that Greenspan’s mea culpa was the sort of thing that shows even the best financial minds are having to adapt to a new reality in the face of the current mortgage-led financial crisis. Greenspan wasn’t the only government official that faced harsh criticism from lawmakers in the hearing. SEC chairman Christopher Cox found himself arguing for the very viability of the agency he heads. “Some have tried to use the current credit crisis as an argument for replace the SEC in a new system that relies more on supervision than on regulation and enforcement,” he said in his testimony. “If the SEC did not exist, Congress would have to create it.” “The SEC had the authority to insist on tighter standards for credit rating agencies,” Waxman argued. “But it did nothing, despite urgings from Congress … over and over again, ideology trumped governance.” “I think every regulator wishes that he or she would have been able to predict before March of this year … the meltdown of the entire U.S. mortgage market,” Cox said, “which was the fundamental cause of this crisis.” Greenspan agreed, noting that “a necessary condition for this crisis to end is a stablization of home prices in the U.S.” The Congressional hearing came one day after Waxman’s committee tackled the rating agencies directly, with three former executives testifying that the agencies sacrificed ratings standards in the pursuit of short-term profit. Complete testimonies are available here.