By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) -- An insatiable global appetite for packaged pools of high-risk mortgages was a significant contributor to the financial crisis, not the subprime loans themselves, former Federal Reserve Chairman Alan Greenspan told a government-appointed inquiry panel in defense of his tenure on Wednesday.
"In my judgment, the origination of subprime mortgages -- as opposed to the rise in global demand for securitized subprime-mortgage interests -- was not a significant cause of the financial crisis," Greenspan told the Financial Crisis Inquiry Commission, which is conducting a series of hearings and investigations into what brought the economy to the brink in September 2008.
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Greenspan was criticized for holding the central bank's interest rates too low for too long, contributing to the crisis, and also for failing to use the Fed's responsibility to protect consumers from subprime and other problem mortgages that were a key contributor to the financial crisis.
Specifically, the former Fed chief -- and his successor Ben Bernanke -- have been criticized for failing to employ the central bank's authority to supervise, write and enforce strong consumer-protection regulations for mortgage and credit-card products.
"Why in the face of all [the subprime lending] did you not move to contain abusive subprime lending?" asked the panel's chairman, Phil Angelides.
Greenspan replied that the institutions subject to the Federal Reserve's or other federal-banking regulators were not the primary players in the subprime-loan origination business.
"The data show that, in 2004 and 2005, more than half of subprime loans were originated by independent mortgage companies subject to consumer-protection enforcement by the Federal Trade Commission and various state agencies," he said.
Warnings
Angelides argued that Greenspan was warned to start examining these kinds of lenders, but did nothing.
The panel chairman said that Greenspan ignored a Fed staff memo in August 2000, entitled "Compliance inspections of nonbank subsidiaries of bank-holding companies," which suggested launching a pilot program to examine these types of lenders. Angelides also pointed out that in 2004, also during Greenspan's tenure, that the Government Accountability Office urged action, noting "a significant amount of subprime lending among holding-company subsidiaries."
Yet there was "no action, no willingness to go in and examine a nonbank subsidiaries," he said.
Former Chairman of the Federal Reserve Alan Greenspan
In response, Greenspan said that a number of consumer and community-government groups did not bring him recommendations "with respect to a number of issues." He added that a series of committee groups, including an outside consumer-advisory group, 12 community groups within each of the Federal Reserve banks and a Fed board subcommittee on consumer and community affairs were charged with coming up with recommendations on bank oversight focused on consumer issues. Former Fed Gov. Edward Gramlich, who passed away in 2007, oversaw the Fed board's subcommittee and chose not to bring those issues to the board, according to Greenspan.
"Supervision and regulation evolved over years. The actions the Fed took were appropriate given the changing circumstances," he said. "The whole operation would have come to the Fed board of governors with recommendations. He [Gramlich] chose not to bring those issues to the board."
However, Angelides contended that Greenspan could have listened to the GAO and staff reports. "Would you put this under the category of 'Oops, we should have done it'?" he asked.
"I don't know," Greenspan replied.
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