Greenspan admits ‘mistake’ related to financial crisis

Former Federal Reserve Chairman Alan Greenspan said he “made a mistake” in presuming that banks would protect their shareholders, but otherwise acknowledged no personal responsibility for the financial meltdown. 

In testimony to a House panel Thursday, Greenspan described the crisis as a “once-in-a-century tsunami,” adding that more bad economic news was yet to come.

{mosads}“Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,” he said. “This crisis has turned out to be much broader than anything I could have imagined.”

Rep. Henry Waxman (D-Calif.), the chairman of the House Oversight and Government Reform Committee, repeatedly asked Greenspan to assess his own responsibility for the crisis. Critics have raised questions about whether Greenspan kept interest rates low for too long, spurring lending.

Greenspan said he found a flaw in his general ideology.

“I made a mistake in presuming that the self-interest of organizations, specifically banks, were such that they were best able in protecting their own shareholders and the equity in their firms," Greenspan said.

He said the breakdown “shocked me. I still do not fully understand why it happened.”

Greenspan said the core of the financial crisis lies with the securitization of home mortgages, and the exploding demand for those products in recent years among investors.

Greenspan appeared at the hearing along with former Treasury Secretary John Snow and current Securities and Exchange Commission Chairman Chris Cox. Separately, a Senate panel heard testimony from a Treasury official tasked with overseeing the government’s plan to inject capital into banks to try to address the troubled credit market.

The official, interim Assistant Secretary of the Treasury for Financial Stability Neel Kashkari, said Treasury has seen “numerous signs of improvement in our markets and in the confidence in our financial institutions” since the department announced its program. At the same time, Kashkari said markets remain fragile.

Snow acknowledged that he and regulatory officials did not do enough to oversee mortgage giants Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that support home loans. The two companies, taken over by the government in September, are at the heart of the housing crisis linked to the meltdown on Wall Street.

“With the GSEs I think we all made a mistake in not acting much, much earlier,” Snow said. “I am confident it would have been a much different kind of crisis. The GSEs were the source of such extraordinary risk in the system.”

All three officials said GSEs were a factor in the crisis, but they didn't lay the blame solely with them.

Cox and Snow agreed that the financial regulatory system must see change, both within the agencies as well as in Congress. Greenspan added that regulation should be explored in credit default swaps — insurance products now in a private market.

Cox said he supports establishing a select committee to overcome the splits between the Senate Banking Committee, House Financial Services Committee and Agriculture Committee, particularly as to how they will oversee derivatives in the future.

“We have a fractured regulatory system,” said Snow, “one in which no regulator has a clear view of the risks inherent in the system. We need to change that.”

Cox suggested regulations might be needed for bank holding companies, credit default swaps and municipal securities. "There are significant regulatory gaps," he said.

Republican House members wrote to Attorney General Michael Mukasey asking the Justice Department to establish an Enron-like task force or to appoint a special counsel to investigate the role of Fannie Mae, Freddie Mac and the Community Reinvestment Act in the crisis.