Greenspan "shocked"

(Reuters)Greenspan "shocked" at credit system breakdown

(NYT)Greenspan Concedes Error on Regulation

(Reuters)Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets

"I'm shocked, shocked!, to find that pimping Adjustable Rate Mortgages while interest rates are at rock bottom leads to an increase in defaults after interest rates return to normal!"

(Reuters)"this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said

Hm...in the unregulated Credit Default Swap (CDS) market, either party can sell the contract without letting anyone else know. The entire point behind derivatives was to spread the risk among multiple parties. The meltdown happens and you're SURPRISED to see that the effects are broad?

(NYT)Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.

Uh-huh. It's all Fannie and Freddie's fault, despite the fact that Ginnie Mae (the government-owned mortgage securitizer) is just fine. Despite the fact that Bear Stearns fell first. Despite the fact that Fannie and Freddie's debts are all insured by the government now that they're under conservatorship, and yet AIG went down. No one else except Fannie and Freddie needs to be regulated.

Greenspan is, thankfully, not as shallow. He acknowledges that Fannie and Freddie are part of the problem. Keyword: part. Yes, they did some extremely shady things, but they have been shady for over a decade, throughout the Presidencies and Congresses controlled by every combination of both parties.

(NYT) But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”

(Reuters)"Without the excess demand from securitizers, subprime mortgage originations -- undeniably the original source of crisis -- would have been far smaller and defaults, accordingly, far fewer," he said.

A surge in demand for U.S. subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.

Emphasis mine. Not enough people focus on the roles of the credit ratings agencies.

The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act . But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law.

This is what makes me think Greenspan knew exactly what he was doing. He knew the credit ratings agencies were underpricing risk. He ENCOURAGED borrowers and lenders to use Adjustable Rate Mortgages while interest rates were ultra-low. He had to know that he was forcing investors to look for better returns in other markets when he held interest rates below inflation. He knew bad mortgages were being issued, and he could have stopped them...but he didn't.