USA: Former Federal Reserve Chairman Alan Greenspan says he's "shocked" at credit system breakdown

Record ID: 1969055

  • Title: USA: Former Federal Reserve Chairman Alan Greenspan says he's "shocked" at credit system breakdown
  • Date: 22nd October 2008
  • Summary: (BN11) WASHINGTON D.C. UNITED STATES (OCTOBER 23, 2008) (U.S. POOL) FORMER FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN WALKING IN WIDE OF GREENPSAN, FORMER TREASURY SECRETARY JOHN SNOW AND SEC CHAIRMAN CHRISTOPHER COX STANDING, TAKING OATH SIDE SHOT OF MEN SEATED (SOUNDBITE) (English) FORMER FEDERAL RESERVE CHAIRMAN, ALAN GREENSPAN, SAYING: "As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief. Such counter party surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined." WIDE OF GREENSPAN, SNOW, COX SIDE SHOT OF GREENSPAN SPEAKING (SOUNDBITE) (English) FORMER FEDERAL RESERVE CHAIRMAN, ALAN GREENSPAN, SAYING: "The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago. Investors, chastened, will be exceptionally cautious. Structured investment vehicles, Alt-A mortgages, and a myriad of other exotic financial instruments are not now, and are unlikely to ever find willing investors. Regrettably, also on that list are subprime mortgages, the market for which has virtually disappeared. Home and small business ownership are vital commitments to a community. We should seek ways to re-establish a more sustainable subprime mortgage market. This crisis will pass and America will re-emerge with a far sounder financial system. Thank you Mr. Chairman." COMMITTEE CHAIRMAN HENRY WAXMAN SAYING: "Thank you very much Dr. Greenspan." WIDE OF WAXMAN AND ROOM
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  • Location: Washington, DC United States
  • City: Washington
  • Country: USA
  • Reuters ID: LVA6EL712LLFWMHCQKK952QD7BOX
  • Aspect Ratio: 4:3
  • Story Text:ormer U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday (October 23) he is "shocked" at the breakdown in U.S.
    credit markets and said he was "partially" wrong to resist regulation of some securities.
    Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.
    "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.
    Banks and other financial institutions need public support, such as the recently approved $700 billion bailout package, to avoid a serious reduction in credit, he said.
    While Greenspan was once hailed as one of the most accomplished central bankers in U.S. history, the low interest rates during his final Fed years have been blamed for fuelling the housing bubble and eventual crash that touched off the current financial crisis.
    The former Fed chair said stabilization of U.S. housing markets -- a necessary precondition for the economy to heal -- is "many months in the future." He said he expected the unemployment rate to jump.
    At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.
    Greenspan urged that securitizers be required to retain "a meaningful part" of securities they issued. He said that regulatory reform will be necessary in the areas of fraud, settlement, and securitization to re-establish financial stability.
    He also conceded he was "partially wrong" about his belief that certain derivatives, such as credit default swaps, did not need to be regulated.
    Lawmakers, with one eye on a general election November 4, lined up on both ideological sides of the debate. Democrats assailed gaps in rules and oversight while Republicans faulted government-sponsored mortgage finance enterprises Fannie Mae and Freddie Mac for contributing to credit market strains.
    "For too long, the prevailing attitude in Washington has been that the market always knows best," Committee Chairman Henry Waxman, a California Democrat said. "The Federal Reserve had the authority to stop the irresponsible lending practices ... But its long-time chairman, Alan Greenspan, rejected pleas that he intervene."
    Republicans countered that regulators were unable to avert disaster because of the extended network of financial oversight agencies and lawmakers' failure to rein in the powerful mortgage agencies, which are congressionally chartered.
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