Today Alan Greenspan is speaking before the financial crisis inquiry commission about the Federal Reserve’s actions during the housing and mortgage boom which preceded the bust. Mr Greenspan has already spoken widely about his view of the Fed’s role in the crisis before Congress, in media interviews, in a recent academic analysis, and in his memoirs. But now it’s the FCIC’s turn to have a crack at him. They’ve got their work cut out for them if they want to get any fresh information from the former Fed chairman.
Update: They do a pretty good job. Note especially that Mr Greenspan says that Congress’s push toward homeownership affected the Federal Reserve’s decisions.
This is the second set of hearings, called “Subprime lending and securitisation and government-sponsored enterprises”. The hearing will last three days and cover 17 witnesses. Mr Greenspan is the first.
The hearing’s over. But here is the FT’s live blog, written as it happened, on the new (and old) Mr Greenspan had to say about the Fed and the crisis.
11:54: A pun! Mr Greenspan gave a “lights out” performance, said Mr Angelides. He thanked him for his responses and his service to the country. And with that, the first part of the three day hearing is over.
11:51: Commissions are asking questions for Mr Greenspan to respond to in writing.
11:49: We’re back mid-comment. Mr Greenspan is reiterating his view that the financial crisis was the 100-year flood. “There are no examples that I’ve been able to find of a breakdown of short-term financial availability on a global scale that occurred within days following the Lehman Brothers.”
11:49: C-span is streaming again. The shades in the room were opened, and Mr Greenspan is speaking up.
11:47: Power outage! Apparently the lights have gone out in the room. A fitting end to a hearing on what went wrong.
11:45: Drat – cspan 2 (on which I’m watching the hearing) is “having a problem with its live coverage”, as in, it’s no longer being streamed. When they return, I’ll return.
11:40: Fact checking Mr Greenspan. Mr Angelides corrects Mr Greenspan on the per cent of mortgage holdings of Fannie Mae and Freddie Mac, and also says that an internal Fed review showed that there were “significant weaknesses in the execution of the supervisory programme.” (The latter was in reference to his statement that the supervisory programme was adequately funded.)
11:39: Preempting the politicos. Mr Thomas insists on decorum. He will finish his questions now, and the Phil Angelides, chairman, will have the last word.
11:36: Moving the chairs around. Mr Greenspan reiterates that he doesn’t think changing who the enforcement agencies are would be particularly effective. But, he says, if the Fed were required to enforce the regulation that it promulgates, the central bank would have to be vastly larger.
11:35: Permanently higher capital levels would address most of the problems out there, says Mr Greenspan.
11:33: Mr Thompson asks if any meaningful change necessary in the regulatory structure. Mr Greenspan replies that what’s done matters more than who does it.
11:30: A large number of innovations fail, says Mr Greenspan. But most succeed. Investors must determine which products fail and which succeed, not the banking system. In order to allow for financial innovation, banks need to be adequately capitalised to absorb the risks.
11:28: John Thompson begins his question period. Other industries have new products tested to make sure they work, Mr Thompson says. He asks should financial products be likewise tested?
11:24: Back to faulting Congress. “That my views were predominating and effective in influencing the Congress is something you may perceive, but it didn’t look that way from my perspective,” Mr Greenspan says. He says it was the purview of Congress to develop financial regulation, not the Fed.
11:23: Mr Greenspan hasn’t had a chance to answer. Ms Born is listing market failures over the past few years (there are a lot).
11:21: Book club. Now Ms Born is quoting from Mr Greenspan’s book, where he refers to his libertarian ideology. Ms Born asks Mr Greenspan: Did your belief in deregulation have any impact on the level of regulation in the US and across the world?
11:20: Mr Greenspan continues to differentiate between interest rate derivatives and other derivatives. He blames AIG’s actions with CDS for many of the problems that grew out of them.
11:18: Ms Born cites the FT’s US managing editor Gillian Tett’s book.
11:15: One derivative isn’t the same as another. Mr Greenspan responds that he objected to regulating interest rate derivatives and foreign currency derivatives. He says that CDS did create problems, but the NY Fed began to deal with the problems fairly early on. CDS was initially a small part of the market, Mr Greenspan says.
11:14: Ms Born lists incidents of Mr Greenspan opposing OTC derivatives regulation. She asks whether credit default swaps played any role in causing or exacerbating the financial crisis.
11:13: Brooksley Born, commissioner, begins her question period. More mic problems.
11:11: Mr Hennessey asks Mr Greenspan what he would ask Fannie and Freddie chiefs. Mr Greenspan asks why – other than for profit – they were such heavy buyers of subprime mortgages.
11:08: Mr Greenspan is allowed to answer. The failure of Fannie and Freddie was a major factor in the crisis (which occurred prior to the Lehman default). “There’s no doubt in my mind that if Fannie and Freddie held only the amount of mortgages to make securitisation possible…we would have been far better off,” said Mr Greenspan. It may even have been enough to avert the crisis, he says (although he’s not confident that it would).
11:06: Mr Hennessey is still asking his question. He’s now speaking about a law passed in 2007 that dealt with GSEs responsibility to assess systemic risk.
11:02: Back to Fannie and Freddie. Keith Hennessey begins his question period. He restates Mr Greenspan’s testimony that the decision of Fannie and Freddie to buy subprime mortgages (which wasn’t revealed until later) in 2003 and 2004 drove down mortgage rates and spurred the housing bubble.
11:02: Mr Greenspan is returning from break. The gavel has banged.
10:51: Break begins. But the mic’s still on. Don’t let people nod or shake their head without also responding verbally, someone admonishes Mr Georgiou.
10:50: Mr Greenspan is called on to say whether he agreed with Mr Georgiou’s comment that the ratings agencies were a problem, since he responded by shaking his head. He agrees that the ratings were problematic.
10:47: Keeping skin in the game. Mr Georgiou says that those issuing the securities weren’t always keeping skin in the game. Mr Greenspan and Mr Georgiou agree that had the securities been rated accurately, they would not have sold at the prices they did.
10:38: Old-fashioned regulation. While the Fed didn’t have any control over capital of investment banks, hedge funds, insurance companies, to the extent that banks lend to those companies that is an issue that extends to the overall markets, said Mr Greenspan. But looking at what banks lend to who and whether the loans are good is the ‘old-fashioned’ regulation. The Fed was relying on the ratings agencies’ triple-A ratings of securities. (That’s the new-fangled regulation, presumably).
10:36: Mr Georgiou asks a question that one of our economists recommended yesterday: did the Fed know what was going on at investment banks that banks regulated by the Fed were lending to?
10:31: Look to the ratings agencies. Mr Greenspan reiterates that, in his view, it’s not the origination, it’s the way the mortgages were securitised and rated that led to the crisis.
10:30: Byron Georgiou, commissioner, begins his questioning. First query? He asks Mr Greenspan to elaborate on this part of his prepared remarks:
Let me respectfully reiterate that, in my judgment, the origination of subprime mortgages – as opposed to the rise in global demand for securitised subprime mortgage interests – was not a significant cause of the financial crisis.
10:27: Heavy CRA commitment. All mergers and acquisitions that the Fed evaluated considered Community Reinvestment Act requirements. Most mergers had some CRA adjustment, and some were rejected because of CRA.
10:24: Book value, market value, discounted cash flow. Mrrs Wallison and Greenspan discuss how securities should be valued. They’re not coming to any conclusion.
10:21: Wow! Mr Greenspan blames political interference. There is a perception that the Fed is an independent agency, and it is to some extent, but we are a creature of Congress, says Mr Greenspan. And Congress was interested in increasing homeownership – they wouldn’t have understood the problem of a housing bubble. (His argument would be stronger if he had given them the chance.)
10:17: The American Dream. Initially, we were trying to prevent redlining, says Greenspan. And, he says, he was supportive of increasing homeownership because “in a market-oriented capitalistic economy” the more people who own property, the more successful the economy will be. A note: encouraging specific asset ownership (rather than wealth generally) isn’t typical of monetary policy.
10:16: Peter Wallison, commissioner, begins questioning. He hearkens back to the day when subprime was praised for increasing homeownership.
10:11: If the private sector can’t do it, neither can government. If you cannot depend on the counterparty surveillance of the individual institutions that we regulate, then we’re not going to be able to do any better, says Mr Greenspan.
10:08: The Fed is not the SEC. The Fed isn’t an enforcement agency and doesn’t have the resources of the DoJ or SEC, says Mr Greenspan. (You know it’s rough when you’re not as well resourced as the SEC).
10:06: No influence. Although the leadership of the Federal Reserve Bank of New York was largely composed of bankers that the Fed regulated, they had no influence on policy, beyond helping the Fed to understand what was going on in the market.
10:05: Ms Murren asks about the composition of the NY Fed leadership – one of the major changes proposed in the Dodd financial regulatory bill.
10:02: Here’s the money. “I do not recall a single instance in which requests for funding for regulation was turned down by the Fed,” said Mr Greenspan. The president of the NY Fed would have swiftly been on the phone with Mr Greenspan complaining had they lacked funding, Mr Greenspan says, but that never happened.
10:00: Where was the money? Ms Murren asks if the Federal Reserve’s regulatory divisions were insufficiently funded.
9:57: Heather Murren, commissioner, begins her questioning. She refers to what was “arguably the height of the housing bubble.” It’s unclear why the the top of the bubble would still be a matter of debate.
9:55: A fatal flaw. If we don’t have adequate capital and liquidity, there will be another crisis, says Mr Greenspan. Fixing regulation will be helpful, but can’t prevent everything, he says.
9:52: “Are you really that pessimistic about our ability to deal with the conditions we find ourselves in?” asks Mr Thomas, referring to this paragraph in Mr Greenspan’s prepared testimony:
We can legislate prohibitions on the kinds of securitised assets that aggravated the current crisis. But investors have shown no inclination to continue investing in much of the past decade’s faulty financial innovations, and are unlikely to invest in them in the future. The next pending crisis will no doubt exhibit a plethora of new assets which have unintended toxic characteristics, which no one has heard of before, and which no one can forecast today. But if capital and collateral are adequate, and enforcement against misrepresentation and fraud is enhanced, losses will be restricted to equity shareholders who seek abnormal returns, but in the process expose themselves to abnormal losses. Tax payers will not be at risk. Financial institutions will no longer be capable of privatising profit and socialising losses.
9:51: Rates were kept down to hedge against deflationary pressures in 2003, not to affect long-term rates, says Mr Greenspan.
9:50: So, Mr Thomas asks, why keep long-term rates low? (He has given himself five more minutes to ask questions).
9:48: Really, think long-term. Changing short-term rates would not have changed long-term rates globally, says Greenspan (again). You cannot explain long-term rates in the United States other than what is being arbitraged through the rest of the world. So the Fed’s monetary policy cannot be blamed for rising housing prices.
9:46: Blaming demand. Thomas says Mr Greenspan seems to be blaming demand for subprime mortgage securities for the crisis. But, Mr Thomas asks, weren’t rising housing prices creating that demand?
9:45: Flashback to third grade. We did the best we could with the data we had, says Greenspan. Getting it right 70 per cent of the time is actually really good, he insists.
9:44: The Fed’s role is primarily monetary policy, but there’s also a regulatory and systematic risk role, says Greenspan.
9:42: What do you do, exactly? Mr Thomas asks what exactly is the role of the Fed, since Mr Greenspan has pointed to other regulators that were at fault in the crisis.
9:41: Everyone’s friends. On the committee at least. Mr Angelides passes the conch shell to Bill Thomas, commission vice chairman. They each call the other “my dear friend.”
9:39: The wrong 30%. Mr Greenspan won’t say whether this goes in the category of ‘oops’ but, he says, he was right 70 per cent of the time, and wrong 30 per cent. On further questioning, he says that some of the regulation may have gone in the 30 per cent category.
9:38: Booyah! Would you put this in the category of ‘oops’? asks Mr Angelides.
9:37: Passing the buck.Mr Greenspan said the person responsible didn’t bring some of the regulation issues to the board.
9:34: Would’ve, could’ve, should’ve. Mr Greenspan says the Fed isn’t an enforcement agency, it can only create regulation. Mr Angelides says had they created effective regulation, others could have enforced it. And, he adds, they should have created the regulation.
9:32: Don’t rewrite history, Mr Angelides says. The Fed took some actions to prevent some abuses – issued guidance, rather than actual regulation – and too late issued insufficient regulation. Did they think regulation was an inappropriate response?
9:29: It’s Fannie’s fault. Mr Greenspan responds that the Fed took measures to prevent abuse in the subprime lending industry. It was the actions of Fannie and Freddie of buying subprime mortgages, which didn’t come to light until 2009, which prevented the Fed’s actions from being effective.
9:28: Finally, Mr Angelides gets to his question – “Why did you allow subprime lending to become such an infection in the market place?”
9:26: Questions begin. Judging from the list of times the Fed was urged to act on subprime, Phil Angelides, commission chairman, is giving to Mr Greenspan, it’s not going to be a softball session.
9:24: We’ve called you here to speak. Stop talking. Mr Greenspan is interrupted in his opening comments and urged to wrap it up so questions can begin.
9:24: Let’s enforce! Mr Greenspan calls for far greater enforcement against misrepresentation and fraud. An interesting question: was the Fed aware of the vast fraud in the subprime mortgage market? (Let’s hope someone asks it).
9:22: Mr Greenspan (still in his opening remarks) says, as he has in the past, that Fed regulation was partially effective in preventing banks from issuing the worst mortgage products.
The supervision of the federal banking agencies, including the Federal Reserve, is an important reason why regulated institutions – meaning banks and bank holding company affiliates – were not as significant a contributor to the origination of the most controversial loan products as non-bank-affiliated companies that operated outside the jurisdiction of Federal bank regulators.
9:19: Mr Greenspan notes (again) that he told the FOMC in 2002 that the housing boom could not continue forever. If only he had said so publicly at the time. FOMC transcripts only become available 5 years after the meeting.
9:18: Think long-term. Again, Mr Greenspan reiterates that it was long-term interest rates (rather than the short term Fed funds rate) that drove up home prices.
9:15: Mr Greenspan (as in his prepared remarks) says the effect of the GSEs holding significant subprime mortgages was to drive home prices up.
9:14: Phew – mic fixed. Greenspan begins to give his opening comments.
9:12 Quickly after Mr Greenspan is sworn in, microphone problems! A tech is working on in. Let’s hope we get the full eighth.
9:10 How much of what the FCIC does is seen by the public during the hearings? One eighth, says Bill Thomas, commission vice chairman. The rest goes on behind the scene.
9:04 Alan Greenspan has arrived. Phil Angelides, commission chairman, has given his opening remarks, repeating the much cited (and incredible) 1 in 4 witnesses are underwater on their mortgages.
