The wreckage of
Wall
Street's subprime mortgage machine was laid bare on Wednesday by a
U.S. congressional panel that pointed the finger at
Alan Greenspan for not
stopping it from running out of control.
The
former Federal Reserve
chairman -- once revered as the oracle of economic wisdom --
defended his legacy before the panel, which also heard a former
Citigroup (
C.N)
executive say he had warned of the subprime danger.
The Financial Crisis Inquiry Commission kicked off three days of
hearings with a look at securitization of
subprime mortgages, in which risky home
loans were bundled and resold in the secondary
debt market.
At the peak of America's real estate bubble, Wall Street firms were
securitizing huge amounts of subprime loans, putting bad assets on
financial institutions' books and unmanageable debts on the shoulders of
many homeowners.
It all came crashing down two years ago, triggering a devastating wave
of foreclosures, paralysis in capital markets, and the worst financial
crisis in generations. Since then, the market for
subprime mortgage debt
has virtually vanished.
"The Fed utterly failed to prevent the financial crisis," said
commission member Brooksley Born at a hearing where Greenspan, other
regulators and banking executives testified.
In reply to Born and other commission members, Greenspan, who is 84 and
retired as Fed chairman in 2006, said:
"Did we make mistakes? Of course, we made mistakes ...
"Managers of financial institutions, along with regulators, including
but not limited to the
Federal
Reserve, failed to comprehend the underlying size, length and
potential impact" of market risks that contributed to the 2007-2009
crisis.
CITI EXEC SAYS HE WARNED RUBIN
But former Citigroup executive Richard Bowen told the panel that he
alerted senior managers to the dangers.
"I warned extensively of the scope of the problems identified, beginning
in June 2006," said Bowen, formerly a senior vice president at
CitiMortgage Inc.
He said he e-mailed former
U.S.
Treasury Secretary Robert Rubin, then chairman of
Citigroup's executive
committee, in November 2007, warning of "the risks of loss to the
shareholders of Citigroup." He said he also requested an investigation.
More on this will come out on Thursday, when the commission is scheduled
to hear from Rubin himself, as well as former Citigroup CEO Chuck
Prince. The government pumped $45 billion in emergency capital into
Citigroup during the crisis.
On Friday, the commission will hear from former executives and
regulators of housing finance giant
Fannie Mae (
FNM.N).
The commission's hearings were not expected to unearth revelations that
significantly alter the tale of the crisis, which is fairly well
understood by now. But its proceedings could add momentum to a push for a
regulatory overhaul.
The
U.S. House of
Representatives approved a sweeping financial reform bill in
December.
The Senate
will begin debate soon on legislation backed on March 22 by a key
committee.
(For a Factbox on
Senate
Banking Committee Chairman Christopher Dodd's bill, double-click on
[ID:nN15206128])
President
Barack Obama,
building on his
healthcare
reform victory, is targeting fast action on financial reform.
"Everyone gets the urgency of this, two years on. I think they get it on
the Hill. I think they get it in the business community," Neal Wolin,
deputy secretary of the U.S. Treasury, told a White House briefing on
Wednesday.
OBAMA TO PUSH FOR REFORM
Obama is expected to push regulatory restructuring as his top domestic
priority when Congress returns on Monday from its Easter vacation.
Administration officials said a bill could get through the Senate and to
the
White House
by late May.
The question of
Wall
Street executive pay surfaced at the hearing, with commission
Vice Chairman Bill Thomas
grilling former Citigroup executive Thomas Maheras over the tens of
millions of dollars he made while working there.
"You made a lot of money. Do you believe now, looking back on that
situation, that you earned all of it?" Thomas asked.
Maheras said he was "paid very handsomely," but that it was consistent
with market norms and reflected Citi's strong performance, at least
until 2007 when he got no bonus.
Maheras was co-CEO of Citi Markets & Banking when he left the firm
in October 2007. A year later, the U.S. government had to pump $45
billion into Citi to keep it from collapsing, in part because of
problems with
collateralized
debt obligations, a business line Maheras was closely involved
with.
"I did lose a lot of sleep," Maheras said, adding though that Citi's big
losses came after he had left the firm.
Thomas said, "But you were there as part of the problem."
Maheras said, "I was."
The Senate bill ranges across many topics, including the problem of
Wall Street executives
receiving huge paychecks, even when their firms lose money, and the
issue of how to fix the broken securitization business.
Critics have accused
loan
originators, bundlers and others along the securitization chain
of undermining loan discipline, obscuring risks behind complex debt
structures and reaping huge fees and profits in the process.
WALL STREET DROVE SUBPRIME GROWTH-EXEC
At the commission hearing, Patricia Lindsay, a former executive at
mortgage firm
New Century
Financial Corp, made clear her view about which end of the
complicated
subprime
mortgage securitization chain drove its expansion.
"The growth in the subprime industry grew because of the securitizations
on
Wall Street
... Loans were just sold in droves to Wall Street. There was a huge
demand for the product ... because of the returns," she said.
The SEC, addressing such concerns, on Wednesday proposed making
mortgage-backed securities
issuers disclose more about underlying loans and keep 5 percent of the
risk in some cases.
In related news,
Goldman
Sachs (
GS.N)
rebutted allegations on
Wednesday that it had benefited unduly from
government help and bet against its own clients during the crisis.
The Wall Street firm said in its annual shareholder letter that it did
not intentionally "bet against" securities in the mortgage market during
the crisis, dismissing suggestions that it unfairly made money by
placing bets against its clients.
David Mikael Taclino
Inyu Web Development and Design
Creative Writer