Big Day for Alan Greenspan at FCIC Hearing

Includes: FMCC, FNMA
by: Tim Iacono

Today's the big day for former Fed chairman Alan Greenspan, correctly selected as the first witness to testify at a three-day hearing of the FCIC (Financial Crisis Inquiry Commission) on the subject of “Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs)”.

The first session, with the 84-year-old Greenspan as the only panelist, begins at 9AM EDT, so, if you live on the West Coast, either plan to get up early or set your DVR, though, aside from the FCIC website (, I don’t know where you’ll find it – maybe on CSPAN, but a quick check of their schedule for today doesn’t show it.

Surely, the major business news channels will show at least part of the feed throughout the morning and, hopefully, someone will put a highlights package together since it looks like he’ll be up there for two or three hours. There are a total of six panels over three days and he’s the only one going solo.

In an attempt to assist the FCIC with their questioning, Fred Sheehan, author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), has taken the time to prepare a few notes for the commission and was even kind enough to send them all copies of his book. Who knows whether they’ll read any of it, but, he certainly does raise a few very good points that deserve a bit more probing, that is, outside of the mostly friendly confines of network television and, in this case, presumably under oath.

Fred lays out three areas areas deserving of attention and provides lots of backup data:

  1. Alan Greenspan and the Government-Sponsored Enterprises
  2. Alan Greenspan Used his Position to Sell Toxic Mortgage Products
  3. The Federal Reserve is Cause, Not Effect, for Abuses in Subprime Lending

On the first topic, the question of Greenspan and the GSEs comes down to a matter of timing. As has been noted many times here at this blog, the only “systemic risk” that the former Fed chairman ever really identified in his career was the GSEs, however, that wasn’t until well after it had become clear that there were serious problems there.

If memory serves, it was back in 2003 that Freddie Mac (FRE) first failed to submit a financial report and Fannie Mae (FNM) ran into trouble not long after. With the help of the former Fed chairman, a good portion of the business of originating mortgage-backed securities moved from Washington to Wall Street and we all know how that turned out.

Fred provides some detail on the pre-2003 period:

In Panderer to Power, my exploration of the housing bubble veers towards the earlier years, 2001-2003. I did this to show that someone in a position of authority who picked up the morning newspaper had to know the Mortgage Machine should be reined in. Aside from fraud, the terms of loans and the incapacity of home buyers to pay their mortgages was a common newspaper topic by 2002. (I quote some of these in my book.)

I chose this emphasis after hearing Alan Greenspan state on 60 Minutes (October 3, 2007): “While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I really didn’t get it until very late in 2005 and 2006.”

You might expect this sort of answer on April 7. It is not credible.

The absurdities in the housing market were already a source of laughter at FOMC meetings in 2002. On November 2, 2002, Atlanta Federal Reserve President Jack Guynn told the FOMC: “The south Florida housing market would have to be characterized as red hot. One director reported that when a moderately priced development on the west coast of Florida opened, demand was so great that sales had to be limited to three homes per customer. That’s a semi-true story. [Laughter]”

Similarly, there is some key backup data provided related to the famous 2004 goading of homebuyers and lenders to take advantage of the near-zero short-term rates via adjustable rate loans and other mortgage products that became increasingly toxic over time.

On February 23, 2004, Greenspan spoke to the National Association of Homebuilders. He claimed the “traditional fixed-rate mortgage may be an expensive method of financing a home” and “[m]any homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages over the past decade.

Greenspan will deny this speech influenced the mortgage market. It did. He was still a demigod to a large part of America. The title of an article in the February 24th Wall Street Journal read: “Fed Chief Questions Loan Choices.” Quoting the first sentence of the story: “In a rare evaluation of the interest rate options that households face, Federal Reserve Chairman Alan Greenspan questioned whether homeowners are well-served by popular fixed-rate long-term mortgages.” Realtors quoted Greenspan in their sales materials. Adjustable-rate mortgages rose from 2% of mortgages in California in 2002 to 47% in 2004 to 61% in 2005. It is a fair though unanswerable question how much Greenspan contributed to the current fiscal problems in California.

Alan Greenspan has run away from this speech since retirement. Here is an excellent example of how he will dodge responsibility when he appears before the Financial Crisis Inquiry Commission.

An interviewer questioned Alan Greenspan about his February 23, 2004 speech at a January 2008 conference in Canada. Greenspan told the interviewr “I strongly clarified my remarks” regarding adjustable-rate mortgages in a speech on March 2, 2004 and “[s]o I plead not guilty.” The transcript of the March 2, 2004, speech to the Economic Club of New York shows no mention of mortgages. He may have discussed adjustable-rate mortgages after the speech, but this certainly did not clarify his remarks to the public.

Greenspan made another attempt to extricate himself in February 2008. Greenspan told an audience in Sweden his warning (or retraction or however he planned to style it) was not in New York but in Chicago on May 6, 2004. This trail was not worth pursuing.

Lastly, some guidance is provided on the question of simply having his hand on the controls of the largest money printing machine in the world – the Federal Reserve.

Credit springs from money. The commercial banking system produces credit, by and large. The Federal Reserve sets reserve requirements on commercial bank credit growth. If the Fed sets the bank reserve ratio at 10:1, a bank cannot lend more than $10 for every $1 on deposit. That effectively limits the growth of credit.

The Federal Reserve has the authority to increase or decrease bank reserve requirements at any time. During Alan Greenspan’s chairmanship, the Fed reduced bank reserve requirements several ways; it never increased them. The result of the Greenspan Fed’s money and credit expansion: commercial banks, having run out of proper projects to fund, lent to investment banks, hedge funds, private-equity funds, subprime mortgage lenders, and commercial property speculators. (An investment bank may have lent to a non-bank mortgage company, but it first had to borrow from the commercial banking system.)

The Federal Reserve, under Alan Greenspan, both printed every dollar that entered the economy and had sole authority to set bank reserve requirements. If the Fed had reduced reserve requirements, this would have restricted the lending that proved so destructive.

Unfortunately, this last line of questioning would ultimately revert back to the fundamental flaws in the monetary system as we know it, a system that has allowed elected officials to work hand-in-hand with the Federal Reserve and Treasury Department to print and spend money that they didn’t have for decades.

If all goes well, the issue of interest rates being “too low for too long” will come up again as it really is deserving of at least a few good one-liners from Commission Chairman Phil Angelides.

Maybe commission member Brooksley Born will have a few choice words for the former Fed chairman too. She has first hand experience of some fatal decisions regarding derivative regulation as chronicled in the PBS Frontline documentary The Warning.

Though this hearing is about subprime and the GSEs, hopefully, there will be some lee-way in the questioning to explore related areas that are in need of investigating.