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Shocked, Shocked by Financial Breakdown

Image has not been found. URL: /wp-content/uploads/2008/10/greenspan.jpg"I still don't understand what happened." (flickr)

A congressional hearing on federal regulators’ role in the financial crisis began with a striking admission.

Former Federal Reserve Chairman Alan Greenspan, who lawmakers regularly referred to as “the Oracle” at past hearings, admitted for the first time that he was “partially” wrong in how he monitored Wall Street from 1987-2006.

“A very solid edifice broke down,” Greenspan told Rep. Henry A. Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform. “That shocked me, and I still don’t understand what happened.”

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Illustration by: Matt Mahurin

Greenspan acknowledged such during his four hours of testimony, as part of the committee’s exploration into what federal regulators did to cause the financial meltdown — and what they could do to prevent future ones.

The former Fed chairman appeared with Christopher Cox, chairman of the Securities and Exchange Commission, and John Snow, the former Treasury secretary. But Greenspan was the focus of attention. A majority of the lawmakers’ questions were directed at him, though only Waxman pushed Greenspan hard.

For their parts, Cox and Snow blamed a lack of coordination among federal agencies, not themselves. And Democratic and Republican lawmakers pointed fingers at each other, with Republicans spending most of their time targeting Fannie Mae and Freddie Mac for the economic troubles.

But at the end of the day, Greenspan was back to confidently defending his record as Fed chairman. Lawmakers were at a loss of who to blame for the financial crisis.

“The people in my district are legitimately angry,” said Rep. Mark Souder (R-In.). “In hearing after hearing, they keep hearing people say, ‘That’s not my responsibility.’”

The oversight committee has held hearings on the collapse of Lehman Bros.; the bailout of American International Group and the short-comings of the credit rating agencies. While those hearings often featured disgraced financial executives, none of them had the visibility of Greenspan, the face of government monetary policy for two decades.

In his opening statement, Greenspan called the financial crisis a “once-in-a-century credit tsunami.” Richard Fuld, former CEO of Lehman, and Martin Sullivan and Robert Willumstad, former CEO’s of AIG, also characterized the crisis as a tsunami.

But unlike the company executives, Greenspan admitted fault — or something close to it — for bringing it about.

“You were the most influential voice for deregulation,” Waxman said. “Were you wrong?”

“Partially,” Greenspan said, “I made a mistake in presuming the self-interest of organizations was such that they were most capable of protecting shareholders.”

Greenspan also said that he “found a flaw” in the ideology of deregulation, a belief system that he said had worked for him for 40 years. “I’m very distressed by that,” he said.

But after the initial exchange between Waxman and Greenspan, the hearing seemed to lose focus.

Rep. John Mica (R-Fla.) got into a long dispute with Waxman about the chairman’s scheduling of a hearing on Fannie Mae and Freddie Mac on Nov. 20. Mica and other Republicans contend that Fannie and Freddie aggressively lobbied Democratic lawmakers to maintain mortgage-lending policies they believe are the root cause of the crisis. “They’re the toxic twins,” said Rep. Bill Bilbray (R-Calif.). “It’s like ignoring an iceberg.”

But government data have suggested that the private sector not, Fannie and Freddie, caused the crisis.

Waxman seized on these reports. “To say the [government sponsored enterprises] started the financial crisis is about as political an argument as saying offshore drilling will fix the energy crisis,” Waxman said. “It’s a political argument not a factual one.”

But it was not just committee Republicans who presented a case for flawed regulatory oversight. Democrats cited an array of Greenspan statements, financial reports and his successful opposition to legislation as elements of their indictment of the former Fed chairman. Few of them stuck.

Rep. Carolyn Maloney (D-N.Y.), for example, said that Greenspan did not want to regulate energy derivatives in 2000, the financial instruments that she claimed lead to the collapse of Enron. Greenspan responded that he had largely forgotten the specifics of the issue but would get back to Maloney.

Delegate Eleanor Holmes Norton (D-D.C.) brought up a 1994 Government Accountability Office report recommending that financial derivatives be regulated. Greenspan said the report was inaccurate because it prematurely predicted a crisis.

In their testimony, Cox and Snow both blamed what they called the “fragmentary” nature of financial regulatory agencies.

“It has become clear to me that no single regulator had a clear view — a 360 degree view,” Snow repeatedly when asked what went wrong.

“Coordination between agencies is complicated,” said Cox. “Agencies themselves administer different laws, and their coordination comes to an abrupt stop.”

But when it came to proposing solutions for new federal regulations for Wall Street, neither Cox nor Snow offered much more than “better coordination.”

As the hearing grinded on, and Greenspan’s familiar self-confidence seemed to return, Rep. Tom Davis (R-Va.) asked him about better inter-agency coordination. “We had as much information as available,” he responded. “I’m not sure if you combine levels of ignorance, you enhance insight.”

Greenspan went on to argue that additional regulation is still not the answer. “The Fed has the smartest people in the world, and they were unable to see this critical problem. Why is that? The answer is that we’re not smart enough as people. We can’t see events that far in advance.”

Despite a rough beginning — Waxman began by citing recent Nobel Prize-winning economist Paul Krugman, who has called Greenspan the main contributor to the financial crisis — “the Oracle” seemed to make a comback with the lawmakers. Even Waxman seemed to back off.

“When I talked to Dr. Greenspan about coming to testify,” Waxman said to Greenspan. “He told me that the hearing could last four hours. You were absolutely on the mark.”

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