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Greenspan Rejects Criticism of Policies at Hearing

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Stephen Crowley/The New York Times 6 . Greenspan Rejects Criticism of Policies at Hearing
Former Federal Reserve Board Chairman Alan Greenspan testified before the Financial Crisis Inquiry Commission hearing on 7 . Automaker Pensions Underfunded by $17 Billion
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hearings 0n the failure to rein in Citigroup, Fannie Mae and the

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subprime mortgage market.

In his testimony, an unflinching Alan

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Mr. Greenspan’s testimony kicked off a day of hearings for the Financial Crisis Inquiry TimesCast, a daily news video.
Commission, a bipartisan panel appointed by Congress to examine the mortgage
meltdown and banking bailouts. Fan us on Facebook

Also testifying is a former Citigroup mortgage lending officer who alerted his bosses about Follow us on Twitter
problems tied to the bank’s underwriting practices and several former senior Citi
executives who presided over decisions contributing to the bank’s collapse. The new issue of T is here

But Wednesday morning was devoted to Mr. Greenspan, who briefly testified in the dark
after the lights went off. (Staff members opened the windows to allow sunlight.)

A particularly sharp exchange occurred between Mr. Greenspan and Brooksley E. Born, a
panelist and former regulator who clashed with Mr. Greenspan and members of the
Clinton administration over derivatives regulation — and lost that battle. In tough
questioning on Wednesday, Ms. Born called on Mr. Greenspan to defend his longtime
deregulatory bent.

“The Fed utterly failed to prevent the financial crisis,” she said. “The Fed and other
banking regulators failed to prevent the housing bubble, they failed to prevent the
predatory lending scandal, they failed to prevent our biggest banks and holding companies
from engaging in activities that would bring them to the verge of collapse without massive
taxpayer bailouts.”

Mr. Greenspan replied that there was a failure: an underestimation of the “state and
extent” of financial risks and the ability of private counterparties to assess them.

“The notion that somehow my views on regulation were predominant and effective at
influencing the Congress is something you may have perceived,” he said. “But it didn’t
look that way from my point of view.”

He also said the banking system had been undercapitalized for 40 to 50 years, and echoing
his remarks in a recent Brookings Institution speech, noted that the only meaningful way
to lessen the impact of future crises was to require banks to hold more capital, and all
financial traders to hold more collateral.

Following Mr. Greenspan, several executives from Citigroup, are expected to testify about
the bank’s risk management and lending practices. Its mortgage-related losses were so
deep that the government stepped in with more than $45 billion of taxpayer money,
including a 27 percent ownership stake.

Several witnesses explained how Citigroup and other big banks originated subprime
mortgages, made loans to independent subprime mortgage companies and bought a huge
number of subprime mortgages that it packaged into complex securities known as
collateralized debt obligations. All acknowledged a sharp deterioration in lending standards
that kept the housing market aloft and Wall Street’s loan-packaging machines humming.

But the most pointed remarks came from a former Citigroup lending officer testified that
he tried to blow the whistle on some of the bank’s lax practices. He recounted how lending
decisions were changed from “turndown to approved” and suggested that 60 to 80 percent
of the loans that Citigroup sold to Fannie Mae, Ginnie Mae, and other investors were
defective.

“I witnessed business risk practices that made a mockery of Citi’s credit risk policies,” he
told the panel. Starting in 2006, he said he repeatedly warned his bosses about the
violations and requested a special investigation from management. Ultimately, in
November 2007, he sent a detailed e-mail meomorandum to Robert E. Rubin, an
influential Citi executive and board member, and the bank’s audit, finance and risk chiefs
alerting them to “the breakdowns in processes and internal controls.”

Mr. Bowen, under friendly questioning, said that a bank lawyer contacted him a few days
after he sent the e-mail memo but then did not hold an in-depth discussion with him until
January 2008. He said he did not know if Citi followed up on his concerns because he was
“not there physically ” and officially left a year later — a statement which he did not
elaborate.

Without specifying a timetable, a Citigroup spokeswoman said the issues raised by Mr.
Bowen were promptly and carefully reviewed when he raised them and corrective actions
were taken.

In a later session, the commission plans to call four other Citigroup executives to discuss
how it managed to write off some $45 billion of complex mortgage bonds it had deemed
supersafe. The huge losses forced the government to step in with bailouts to prevent the
bank’s collapse.

In their testimony, the four executives insisted that they vastly underestimated the
magnitude of the financial storm and failed to appreciate the risks of holding such a large
portfolio of mortgage-related investments. So-called “super-senior C.D.O.’s” were held out
to be supersafe, they asserted.

Those beliefs were reinforced by credit rating agencies and the bank’s own stress tests and
risk models, which failed to capture a severe nationwide decline in housing.

“No one, including myself, ever conceived we would see real estate prices plunge 30 to 40
percent, with homeowners walking away from homes en masse for the first time ever,” 
Thomas Maheras, the former co-head of Citi’s investment bank who oversaw its mortgage
activities, said in a prepared statement.

He expressed “regret” that he nor his colleagues did not see the housing crisis coming.

David C. Bushnell, Citigroup’s former chief risk officer, was less contrite in his prepared
remarks, which stopped short well short of a personal apology. In his testimony, Mr.
Bushnell pointed out that other market participants and regulators made similar errors
and he called it a “rational, but in retrospect, mistaken business judgment” to keep such a
big position.

Three other former Citigroup executives were also expected to address the commission:
Nestor Dominguez , the former head of Citi’s C.D.O. group; Murray Barnes, the risk
officer directly responsible for the C.D.O. unit; and Susan Mills, the head of the mortgage
finance group in Citi’s investment bank.

None of the Citigroup executives addressed in their prepared statements how

compensation influenced their judgment. Nor do they acknowledge that around the same
time, a handful of investment banks, like Goldman Sachs, and several savvy investors
ratcheted down their mortgage exposures.

Two additional Citigroup officials are scheduled to testify on Thursday. Charles O. Prince
I I I, the former chief executive who presided over the losses, will be questioned alongside
Mr. Rubin, an influential adviser and a former Treasury secretary.

Sewell Chan reported from Washington, and Eric Dash from New York.

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Past Coverage
Looking Back, Greenspan Says Wall Street Needs a Tighter Rein (March 19, 2010)
ECONOMIC VIEW; Flaw in Free Markets: Humans (September 13, 2009)
While Regulators Slept (August 9, 2009)
Ivory Tower Unswayed By Crashing Economy (March 5, 2009)

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