By Denny Gulino

WASHINGTON (MNI) – In the continuing battle to shape how history —
and future regulatory policy — will apportion blame for the financial
crisis, former Federal Reserve Chairman Alan Greenspan Wednesday gave up
some ground, conceding he was wrong about 30% of the time, yet
maintained Congress has increasing “amnesia” about its contribution to
chaos.

Greenspan’s key perspective was the first sought out by the
congressionally created 10-member bipartisan Financial Crisis Inquiry
Commission which will hold two more days of hearings this week, more
later and eventually come up with a voluminous report. Greenspan’s
testimony suggested it will have a hard time narrowing down the many
contributing factors.

As to his own performance heading the Fed during the years leading
up to the crisis, Greenspan heeded the advice to be candid, conceding he
was wrong about 30% of the time, didn’t understand the implications of
subprime lending’s huge expansion, harbored his own skepticism about the
way Congress directed financial regulators to treat mortgages, misjudged
the level of capital the U.S. banking system required and was wrong
about the degree of self-correction some markets could do under
stress.

Some questioning stressed the way Congress mandated an expansion of
mortgage lending to people most likely to default, and how in an
overwhelming bipartisan way, Congress cordoned off any consideration of
systemic risk when it came to how Fannie and Freddie were expanding
their portfolios. “There’s a lot of amnesia that’s emerging, apparently”
in Congress, he said.

Had the Fed tried to fight the tide of congressional pressure and
“the fairly broad consensus” to expand homeownership, “then Congress
would have clamped down on us,” he said.

In his prepared testimony, Greenspan said he had warned as long ago
as 2004 about the systemic risk posed by Fannie and Freddie’s expansion
of their retained portfolios beyond the trillion-dollar level and said
he never got a “straight answer” from the GSEs about why they were
doing it. He recommended former GSE officials be asked about it when
they appear before the Commission.

Others focused on how the Fed allegedly “blew it,” referring in one
year, for example, only two small cases of mortgage fraud to the Justice
Department when evidence was mounting of dozens if not hundreds of major
cases. Greenspan said many cases were remediated before charges were
brought. A frequent topic was a favorite of critics, whether the Fed
kept rates too low for too long. Greenspan said the Fed was afraid of
Japan-type deflation.

Still other questions touched on the biggest of the macroeconomic
influences on low rates, the global imbalances that pushed mountains of
assets toward surplus economies, in effect, Greenspan said, finally
immunizing long rates against the Fed’s monetary policy influence.

Afternoon witnesses subsequent to Greenspan filled out a picture of
virtually nonexistent industry mortgage underwriting standards, of the
knock-on effects of bad appraisals on housing values and competitive
pressures to take advantage of a securitization model in which no one
set of players had responsibility for whether loans were viable.

In Thursday’s hearing, the Commission will hear from one of the
people central to the drama who became one of its highest profile
victims, Charles “Chuck” Prince, the former Citigroup CEO and chairman
whose career was buried under an avalanche of collapsing MBS and CDOs.
With him will be another central figure, Robert Rugin, former Treasury
secretary and high-paid Citi corporate gray eminence, a non-executive
Citi director until January of last year.

Greenspan, however, may have set the tone for all of the
forthcoming witnesses, candid about what he considered the baggage
anyone in his position carried, but not conceding that his failings were
a special case that contributed something avoidable to the crisis and
its underpinnings.

“The fundamental cause of the crisis goes back to the end of the
Cold War,” he said. “It is a global crisis. You cannot think of the
United States crisis in any form without looking of the global context”
of the mounting supply of cheap capital available from abroad that kept
long rates low.

“You cannot explain long-term rates in the United States other than
what is being arbitraged from the rest of the world,” Greenspan said.
By the middle of the last decade, “Short-term rates, that is, the
federal funds rate over which we had full control, did not affect
long-term rates.” Even though the Fed tightened starting in mid-2004,
“We had very little to negligible effect on inflation.”

When the fed funds rate was kept low, it was as insurance against
Japan-type deflation until mid 2004, he said.

Greenspan, 84, who has written several times, including in his
book, went beyond what he’s said before in looking at what he suggested
is characteristic of government policy work — the constant considerable
rate of failure, a rate he said was around 30%. “We made an awful lot of
mistakes,” he said, and it’s “futile” to look back and besides, everyone
else, from the heads of the largest banks to other regulators, made the
same mistakes.

Greenspan repeated that what the Fed and “everyone else” had
considered adequate capital for the U.S. banking system was wrong. “The
major mistake in the system — that (the) adequate capitalization issue
was a function of what your risk management situation is” but after
Lehman’s collapse, regulators realized they were way off. Risk
management wasn’t working. He said the U.S. banking system had been
undercapitalized for “40 to 50 years.”

Greenspan said no regulatory rearrangement can simply replace the
“old fashioned” knowledge individual financial firms have about their
counterparties. “They have to be the first line of defense,” he said.
“If they fail — and they did in this instance — it’s not a simple
issue of saying let’s regulate better.”

Greenspan said the question of centralization of regulation has
“effective arguments on both sides” and that centralization by itself
would make oversight more effective.

The former Fed chairman also said in his long experience the
private-sector members of the New York Fed Board, some of them
executives of the largest banks the Fed regulates, don’t make policy but
do provide invaluable information for Fed policymaking. Proposed
regulation would fill the Board with political appointees.

Greenspan said he has heard reports that the New York Fed was
underfunded and that it could not fulfill its mission. He said while he
was chairman he never got the first call from the president of the New
York Fed complaining about funding. He did concede the New York Fed
personnel had “a significant amount of turnover, which does create
managerial problems.”

The Commission’s three days of hearings will also examine the
regulatory oversight of Fannie and Freddie, the reasons given for its
huge expansion in its portfolios — which Greenspan said was not
envisioned when Congress chartered them — and the Office of The
Comptroller of the Currency’s oversight of Citigroup.

He said as far back as 2002 he warned that monetary policy was
being superceded on a global basis as an influence on long-term interest
rates by the capital available from beyond U.S. borders. “By 2002 and
2003 it had become apparent that individual country long-term rates were
in effect delinked from historical ties to central bank overnight
rates,” he said.

He said he warned that the “extraordinary housing boom … cannot
continue indefinitely. Yet it did continue despite the extensive
two-year-long tightening of monetary policy that began in mid 2004.”

The Federal Reserve Board, he said is a “rulemaking” entity, not an
enforcement agency. “We covered as much as anyone could conceive of,” he
said.

** Market News International Washington Bureau: 202-371-2121 **

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