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Greenspan defends Fed's handling of subprime mortgage market

While admitting mistakes, he warns a panel examining the 2008 financial meltdown that regulators can't predict crises. Institutions must be required to hold more capital and collateral, he says.

  • Former Federal Reserve Chairman Alan Greenspan is sworn in before testifying… (J. Scott Applewhite / Associated Press)
April 08, 2010|By Jim Puzzanghera

Reporting from Washington — The federal commission probing the financial crisis took aim at the causes of the subprime mortgage meltdown, but former Federal Reserve Chairman Alan Greenspan said Wednesday that it shouldn't point at him.

Summoned to address sharp criticism that the Fed failed to stop the housing bubble and the risky mortgages that helped pop it, Greenspan strongly defended his actions and warned that regulators alone couldn't stop financial crises.

The best prevention, he said, would come from increasing requirements on banks and other financial institutions to have more money and collateral to carry them through rough times.

Greenspan, whose reputation as a financial sage has soured since the market meltdown, fought back against tough questioning by some members of the Financial Crisis Inquiry Commission as it began three days of hearings on subprime mortgages.

He admitted mistakes in his 18-year tenure as chairman, which ended in 2006. But he denied that his strong free-market ideology led him to neglect the Fed's responsibility for regulating some of the nation's largest banks and for writing rules to protect consumers from unscrupulous lenders.

"I don't have the discretion to use my own ideology to affect my judgments as to what the Congress is requiring the Federal Reserve and others to do," Greenspan said during 2 1/2 hours of sometimes combative testimony that ended amid a brief power failure in the hearing room.

"I ran my office as required by law, and there's an awful lot of laws that I would not have constructed in the way they were constructed. But I enforced them nevertheless because that was my job," he said.

Commission member Brooksley Born said that under Greenspan, the Fed "utterly failed to prevent the financial crisis."

Born, a Democratic appointee and former head of the Commodity Futures Trading Commission, hammered Greenspan for endorsing the deregulation of complex financial derivatives, such as credit default swaps, that helped cause the crisis and the near-collapse of insurance giant American International Group Inc.

"Are you aware that the collapse of AIG was caused by its commitments under credit default swaps that it had issued?" Born asked Greenspan. "The taxpayer has had to bail out AIG because of its exposure on credit default swaps to the tune of more than $180 billion."

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