Greenspan Testifies To Financial Crisis Commission, Blames Fannie, Freddie For Subprime Crisis (LIVEBLOG, VIDEO)

(We'll be running a live blog of the testimony at the Financial Crisis Inquiry Commission's latest round of hearings in Washington, D.C. Former Federal Reserve Chairman Alan Greenspan is scheduled to speak today; tomorrow will feature former Citigroup CEO Charles Prince and former Citigroup chairman and ex-Treasury Secretary Bob Rubin. Check back here for regular updates and video.)

UPDATE: 5:30 PM Greenspan: Lehman Brothers Would Have Needed An Additional $80 Billion To Survive - Shahien Nasiripour

Lehman Brothers would have needed an additional $80 billion in capital to survive the financial crisis that forced it into bankruptcy, according to Wednesday testimony given by former Federal Reserve Chairman Alan Greenspan and a Huffington Post review of the firm's regulatory filings.

"I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. I presume, for example, that with 15% tangible equity capital, neither Bear Stearns nor Lehman Brothers would have been in trouble," Greenspan told the Financial Crisis Inquiry Commission, the panel created by Congress to investigate the roots of the financial crisis.

Tangible common equity is defined as total shareholder equity minus preferred stock, goodwill and other intangibles. As of the end of May 2008, Lehman had $15.2 billion of this kind of equity.

But the 15-percent figure Greenspan refers to takes tangible common equity and divides it by tangible assets, which is total assets minus goodwill and other intangibles. At that time, Lehman had $635.3 billion in tangible assets, for a quarter-end figure of 2.4 percent tangible equity capital.

To meet that 15-percent figure that Greenspan outlined, Lehman would have needed $95.3 billion, or an additional $80.1 billion.

Put another way, Lehman Brothers would have needed about six times as much cash than it had at the time of the crisis in order to survive.

Lehman declared bankruptcy in September 2008.

Greenspan offered a reason why firms wouldn't want to squirrel away so much capital.

"Increased capital, I might add parenthetically, would also likely result in smaller executive compensation packages, since more capital would have to be retained in undistributed earnings."

In other words, smaller bonuses.

This post has been corrected (thanks to Rolfe Winkler at Reuters, a former analyst at a hedge fund and a chartered financial analyst).

UPDATE: 4:00 PM Ex-Citi Execs Slow To Raise Hands When Asked, "Did You Lose One Night Of Sleep Over What Happened?"

A classic moment during today's hearing was when vice-chairman Bill Thomas asked a group of former Citigroup executives whether they lost any sleep over what happened. When they were slow to raise their hands, with one executive meekly offering, "I lost a lot of sleep," Thomas slapped them down, "No, no hands. You didn't lose one..."

The question was clearly reminiscent of the November 2008 hearing during which CEOs of the big three automakers were asked if they flew to Washington.

Later, Thomas compared the executives unfavorably to overpaid New York Yankees star Alex Rodriguez, who finally helped the team win the World Series last year.

Here are Thomas's comments in full:

"A consequence of what we try to do in our job of trying to explain to Americans what happened, I assure you, probably won't contain one word of what you folks just told us. Did any of you, and I'll just ask a show of hands and I assume you'll be honest in your response, lose one night of sleep over what happened? No, no hands. You don't lose one... No, I didn't prompt you. I said, did you lose one night of sleep? The answer is supposed to be yes, you raise your hand. You lost a lot of sleep. Yes. As someone who earned as much money as the most highly paid player on the New York Yankees is that at least he can show a Word Series win for what he got. And if they do various things that are against the rules, they've got to pay fines and do other stuff... I'm not going to dwell on the money, I can't comprehend it."

WATCH:

UPDATE: 2:30 PM Under Geithner, New York Fed Slammed For Supervision Of Citigroup, Internal Docs Show - Shahien Nasiripoour
Under the supervision of current Treasury Secretary Timothy Geithner, the Federal Reserve Bank of New York failed to conduct the kind of regulation of Citigroup that was "ideal," said former Federal Reserve Chairman Alan Greenspan during his testimony Wednesday before a panel convened to investigate the roots of the financial crisis.

"...[T]here are insufficient resources to conduct continuous supervisory activities in a consistent manner," notes a Fed review from May 2005 of the New York Fed's supervision over Citigroup.

The admission came in the form of a question posed by Heather H. Murren, a commissioner on the Financial Crisis Inquiry Commission, in which she tried to glean more information from Greenspan about the Fed's supervision over large financial institutions. Citigroup, with nearly $1.9 trillion in assets, is the nation's third-largest bank by assets.

Geithner served as president and CEO of the New York Fed from November 2003 until he was confirmed as Treasury Secretary under President Barack Obama in January 2009.

Greenspan, in Wednesday remarks before the investigatory panel, said that the "ideal way" to supervise banks would be to go through its individual loan documents -- the way supervisors used to police banks and financial firms before they grew so large.

But now, it's no longer possible. "The complexity is awesome," Greenspan said. Bank regulators, like those at the New York Fed, "are reaching far beyond [their] capacities."

Citigroup has lost nearly $30 billion over the past two years, according to regulatory filings with the Securities and Exchange Commission. Taxpayers bailed out the firm to the tune of more than $45 billion in 2008. The U.S. government guaranteed much of the potential losses on a $301 pool of toxic assets, giving the firm significant breathing room by putting taxpayers on the hook. Citigroup has issued nearly $65 billion in Federal Deposit Insurance Corp.-guaranteed debt, a little-noticed bailout for banks that lets them borrow money cheaply while putting taxpayers on the hook for potential losses.

During his tenure, the bank supervision group at the New York Fed answered directly to Geithner. At the time, Citigroup was the biggest firm under the New York Fed's oversight.

No institution showed up as frequently on his 2007 and 2008 appointment calendars as Citigroup, according to a review by the nonprofit investigative news organization ProPublica.

Less than a year after Geithner left for the Treasury Department, another Fed report tore into the New York Fed's supervision of Citigroup:

"The supervision program for Citigroup has been less-than effective," the December 2009 report notes. "Although the dedicated supervisory team is well qualified and generally has sound knowledge of the organization, there have been significant weaknesses in the execution of the supervisory program."

Citigroup repaid the Treasury $20 billion of the $45 billion it received. The rest remains outstanding. The Treasury Department was not available for immediate comment. Neither was the New York Fed.

UPDATE: 1:35 PM: Ex-Citi Exec Says He Warned Rubin, Management About Subprime - Ryan McCarthy

In the commission's afternoon session, Richard Bowen, the former senior vice president and business chief underwriter for CitiMortgage, told the panel that he issued warnings on the subprime crisis to Citigroup execs as early as 2006. (Check out a PDF of Bowen's full testimony here.)

As Felix Salmon noted, Bowen's sent emails to Citi execs -- including ex-chairman Robert Rubin, who will be grilled by the panel tomorrow -- with subject lines like "URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES," but the warnings went unheeded.

Here's more from the AP's Daniel Wagner:

WASHINGTON - A former executive of Citigroup Inc. is telling a panel investigating the roots of the financial crisis that he warned former chairman Robert Rubin and other bank leaders about the coming mortgage crisis back in 2006.

Richard Bowen says other Citigroup executives were violating the bank's own risk management standards starting in 2006. He says he discovered in the middle of that year that over 60 percent of the mortgages bought and resold by subprime subsidiary Citifinancial Mortgage were defective. Bowen was chief underwriter for the division.

Bowen says he issued many warnings to management about the mortgage risk starting in 2006, and e-mailed Rubin in November 2007.Bowen's testimony is part of three days of hearings by the Financial Crisis Inquiry Commission.

UPDATE: 12:00 PM Power Goes Out

Soon after the power went out, casting the hearing room in dark shadows and accentuating the drama of the FCIC's purpose, one reporter quipped, "Now we're literally, as well as figuratively, in the dark."

UPDATE: 11:50 AM Greenspan: Banks Have Been Undercapitalized For Past '40 to 50 Years' - Shahien Nasiripour

The U.S. banking system has been "undercapitalized" for the past "40 to 50 years," former Federal Reserve Chairman Alan Greenspan told a panel today in Washington convened to investigate the roots of the financial crisis.

In response to a question about the Fed's failure to guard against megabanks becoming so large and interconnected that they posed a systemic risk -- risks that pose threats to the entire financial system -- Greenspan said the Fed wasn't alone in that regard.

Rather, he said, everyone -- the financial industry and their regulators at the Fed -- failed to appropriately appreciate how badly banks were guarding themselves against risk.

Once the Fed realized how poorly the banks' risk management systems were, Greenspan realized how poorly they were capitalized -- money, in short, that banks keep on hand to protect themselves from going under in the case of huge losses.

In fact, the banking system has been "undercapitalized" for the past "40 to 50 years," he said.

Put another way: for the past few generations, the U.S. banking system has not been holding enough money to guard itself from insolvency, putting taxpayers at great risk in case a panic were to materialize -- a lesson painfully learned in 2008.

When regulators judge banks to be undercapitalized, the banks are told to shore up their capital or shed potential sources of future losses, like sour loans or underperforming businesses. If they can't, they're shut down. Most of the time, it's an open-and-shut case.

"The risk management paradigm nonetheless harbored a fatal flaw. In the growing state of euphoria, managers at financial institutions, along with regulators including but
not limited to the Federal Reserve, failed to fully comprehend the underlying size, length, and potential impact of the so-called negative tail of the distribution of risk outcomes that was about to be revealed as the post-Lehman Brothers crisis played out," Greenspan said in his prepared remarks.

"For decades, with little to no data, almost all analysts, in my experience, had conjectured a far more limited tail risk. That led to more than a half century of significantly and chronically undercapitalized financial intermediaries, arguably the major failure of the private risk management system.

"The financial firms counted on being able to anticipate the onset of crisis in time to retrench. They were mistaken. They believed the then seemingly insatiable demand for their array of exotic financial products would enable them to sell large parts of their
portfolios without loss."

But that didn't happen -- a lesson the U.S. learned several hundreds of billions of taxpayer dollars later.

UPDATE: 10:45 AM Greenspan Says Financial World Too Complex For Regulators - Shahien Nasiripour

Former Federal Reserve Chairman Alan Greenspan made the kind of admission this morning that may trouble those who assume that better regulators -- rather than a wholesale rewriting of rules -- will better protect Americans from a future financial crisis.

Regulators can't keep up with today's megabanks, he said. They're too complex. Regulators, in short, don't have a chance.

Greenspan, appearing before the panel convened to investigate the roots of the financial crisis, said that the "ideal way" to supervise banks would be to go through its individual loan documents -- the way supervisors used to police banks and financial firms before they grew so large.

But unfortunately, he lamented, that's no longer possible because firms are so complex.

"We are reaching far beyond our capacities," Greenspan told the Financial Crisis Inquiry Commission. "It's not a simple issue of 'Let's regulate better,'" he said. "It's a different world."

"The complexity is awesome," he noted.

Instead, regulators need to rely on banks' counterparties -- those they do business with -- as a first line of defense.

But that failed in 2008, Greenspan admitted. Counterparties were left holding the bag when the firms they did business with -- like Lehman Brothers and AIG, for starters -- nearly went belly up (Lehman ended up declaring bankruptcy). Taxpayers were forced to bail the firms out -- money that in AIG's case went straight to its trading partners, like the billions that went to Goldman Sachs -- in what some members of Congress have called a "backdoor bailout."

"If you cannot depend on counterparty surveillance," Greenspan warned, regulators are much less effective.

So, in effect, it really doesn't matter who's regulating -- the industry has to step up its self-regulation by keeping counterparties in check.

Some experts have offered alternatives to this model, like strict rules calling for specific capital and leverage levels; banning certain activities; and breaking up the megabanks so they don't have such a stranglehold on the financial system.

The Obama administration, notably, has shied away from strict rules. Rather, the administration is pushing Congress to give regulators greater authority to rein in the financial industry -- rather than outlining in law what is and what isn't allowed, what banks need to keep in their reserves, or other firm rules.

In essence, the administration argues, it should be up to the regulators.

UPDATE: 9:45 AM Greenspan: I Was Right 70 Percent Of The Time - Ryan McCarthy

While being grilled by commission chairman Phil Angelides, Alan Greenspan offered a guess about his batting average as head of the Federal Reserve. In fact, Greenspan seemed to pat himself on the back for only being wrong 30 percent of the time.

Angelides asked whether or or not Greenspan would characterize his handling of the subprime crisis as a mistake -- a fair question that got a fairly convoluted answer. Here's the exchange:

Angelides: Would you put this under the category of 'Oops,' we should have done it?

Greenspan: When you've been in government for 20 years, as I have been, the issue of retrospective and figuring out what you should have done differently is a really futile activity... My experience has been, in the business I was in I was right 70 percent of the time, but I was wrong 30 percent of the time and there are an awful lot of mistakes in 21 years.

Angelides: Would you put this in the 30 percent category?

Greenspan: I don't know.

WATCH the exchange:

Greenspan To Financial Crisis Commission: Roots Of Crisis In Communism's Fall, Fed Isn't To Blame - Shahien Nasiripour

In prepared remarks before the panel investigating the roots of the financial crisis, former Federal Reserve Chairman Alan Greenspan blames the subprime crisis on foreign investors, nonbank lenders, the spread of securitized mortgages and financial firms for failing to manage their risk. The one person he did not blame was himself, or his institution -- the Fed.

Greenspan, long considered "The Maestro" for his handling of the economy during the 1990s, has been widely blamed for putting in place policies and philosophies that led to a bubble economy and the subsequent abrupt bursting of that bubble. In short, he trusted the markets and its participants to act intelligently, and believed regulators best regulated with a light touch -- if not a hands-off -- approach.

With the worst financial crisis to rock the country since the Great Depression, costing Americans more than 8 million lost jobs, critics are now circling Greenspan, pointing out faults and failures that many believe caused the crisis.

Yet while Greenspan admitted in 2008 to Congress that there was a "flaw in the model that I perceived is the critical functioning structure that defines how the world works," he offers no such mea culpa in his prepared remarks.

Rather, it was the securitization of subprime mortgages, readily purchased by foreign investors and Fannie Mae and Freddie Mac (which were pushed to do so by the federal government); the origination of those mortgages by firms outside the Fed's jurisdiction; and financial firms that bought that junk without appropriately planning for a possible downturn, that caused the downturn, Greenspan contends.

In fact, the Fed "was quite active in pursuing consumer protections for mortgage borrowers," Greenspan said in his remarks.

That contradicts nearly every major report that's come out on the Fed's record since the onset of the crisis.

Also, the Fed, he said, actually tried to rein in the excessive lending that was going on during the go-go years.

In 2002, I expressed concerns to the FOMC, noting that "...our extraordinary housing boom...financed by very large increases in mortgage debt - cannot continue indefinitely." It did continue for longer than I would have forecast at the time, and it did so despite the extensive two-year -long tightening of monetary policy that began in mid-2004

Many have blamed the Fed for not doing enough to stem the boom in lending -- particularly risky subprime lending. It is the nation's central bank, after all. It has a plethora of tools to stem reckless lending. But it didn't use a single one.

Interestingly, Greenspan traces the roots of the crisis to the fall of communism and the liberalization of markets. Here's Greenspan:

It was the global proliferation of securitized U.S. subprime mortgages that was the immediate trigger of the current crisis. But its roots reach back, as best I can judge, to 1989, when the fall of the Berlin Wall exposed the economic ruin produced by the Soviet system. Central planning, in one form or another, was discredited and widely displaced by competitive markets.

READ his remarks below: