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Greenspan and Co. Describe Wall Street 'Tsunami'

POSTED: 04:01 PM ET, 10/23/2008 by Derek Kravitz

Today's congressional hearing on the "actions and inaction of federal regulators" behind the Wall Street financial crisis featured some dire words from three of the chief architects of the country's financial system.

Notably, former Federal Reserve chairman Alan Greenspan likened the crisis to a "once-in-a-century" tsunami and admitted to having a "flaw" in his financial ideology; Christopher Cox, chairman of the Securities and Exchange Commission, said aggressive law enforcement among investment firms and bankers was "needed now more than ever;" and John W. Snow, the former Treasury Department secretary, called the markets "deeply troubled," "fractured" and "frozen."

A collection of notable quotes from the House Oversight and Government Reform Committee hearing:

ALAN GREENSPAN, former chairman of the Federal Reserve


Greenspan

"We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures. You importantly represent those on whose behalf economic policy is made, those who are feeling the brunt of the crisis in their workplaces and homes."

"Well, partially." -- Greenspan's response to Waxman's question about whether the former Fed chairman was "wrong" in being such a "staunch advocate for letting markets regulate themselves."

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

See more quotes from Greenspan and others at the hearing after the jump

"So the problem here is something which looked to be a very solid edifice and, indeed, a critical pillar to market competition and free markets did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened. And obviously to the extent that I figure out where it happened and why, I will change my views. And if the facts change, I will change."

"If all those extraordinarily capable people were unable to foresee the development of this critical problem, which undoubtedly was the cause of the world problem with respect to mortgage-backed securities, I have to -- I think we have to ask ourselves why is that.

And the answer is that we're not smart enough as people. We just cannot see events that far in advance. And unless we can, it's very difficult to look back and say, Why didn't we catch something. "

"What I'm saying to you is yes, I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact...A flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak."

"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."

"This crisis will pass, and America will reemerge with a far sounder financial system."

REP. HENRY A. WAXMAN (D-Calif.), chairman of the House Oversight and Government Reform Committee


Waxman

"The list of regulatory mistakes and misjudgments is long, and the cost to taxpayers and our economy is staggering."

"For too long the prevailing attitude in Washington has been that the market always does best."

"Over and over again, ideology trumped governments. Our regulators became enablers rather than the enforcers. Their trust in the wisdom of the markets was infinite. The mantra became government regulation is wrong. The market is infallible."

CHRISTOPHER COX, chairman of the Securities and Exchange Commission


Cox

"Most importantly, we've learned that voluntary regulation of financial conglomerates does not work."

"Certainly, aggressive law enforcement is needed now more than ever. The SEC is a law enforcement agency dedicated to making sure that anyone who broke the securities laws is held accountable. And we are very, very busy on that right now."

"The crisis in banking, the credit crisis that we're living through, is a mortal danger to many of these institutions, and so determining the extent to which violations of the law may have contributed to this and holding anyone who violated the law accountable is of vital importance, and we are committing massive resources to it."

REP. ELIJAH E. CUMMINGS (D-Md.)

"My question is where have you been all these years?...Now, you became SEC chairman over three years ago. Why didn't you act sooner to require this disclosure of credit-default swaps?" -- Cummings to Cox, who responded "we would have like to have known what we know now, I think, years ago."

REP. MARK SOUDER (R-Ind.)

"They are legitimately angry that people seem to sit here, hearing after hearing, 'well, it wasn't my responsibility, and that you kind of knew it was happening, and whether it was Congress or here or there.' But they are furious." -- Souder, referring to American citizens "endangered" by the financial crisis.

"It's the culpability of the people who knew what they were buying, who were pretending to see no evil, hear no evil, report no evil, and the question is, even in an unregulated market, my belief is, is that many of them are criminal."

JOHN W. SNOW, former secretary of the U.S. Department of the Treasury


Snow

"We meet in an extraordinary time. Nowhere that I can recall during my adult lifetime has the financial system been so deeply troubled, so fractured, frozen."

"I regret I wasn't more effective in trying to persuade Congress of the need for action to deal with the risks that I saw as the largest and most visible systemic risk at the time."

"I think regulators need more transparency on the risks and the leverage in the financial system."

"Congressman, I actually think it's a much broader phenomenon, and in the risk of being maybe a little controversial here -- you know, we have had a policy in the United States to promote home ownership for a long time. That's a good thing...And I think the larger problem here, frankly, is that we've probably somewhat overdone that without reference to the consequences that that commitment to -- to housing has created for the country as a whole. I think we've got to rethink that balance."

By Derek Kravitz |  October 23, 2008; 4:01 PM ET Economy Watch
Previous: Financial Crisis Fallout, Campaign Countdown, DHS to Screen Passengers | Next: Feds Seeks Anthrax-Scare Culprit

Comments

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He's the "former" chairman. Why is he still appearing before congress? Isn't that the job of the new guy?

Posted by: tgolamb | October 23, 2008 5:03 PM

Greenspan thought deregulation would bring a self governess in the banking system. These greedy CEO’s were supposed to police each other, not con each other. Deregulation bought out the worst of Wall Street, and America was pillaged. This greed and neglect of self governess have bought on the worst financial storm that the world has ever faced. Once the dust settles, America should band together and bring on a class action suit against the actions of these CEO’s. According to Greenspan, “believed lending institutions would do a good job of protecting their shareholders” instead, they profited, jump ship and left the American tax payers holding the bag (i.e. http://www.BuyMyHouseBeforeTheBankTakesIt.com).

Posted by: EconomistUSA | October 23, 2008 5:05 PM

Everyone keeps talking about how an "organization" would look after its own interests. An "organization" can't: only the people involved with it can. The trouble is that the INTERESTS of the CEO and a significant portion of the Management of the organization - the people who end up making all the substantive decisions on behalf of the Organization - are significantly different from the long-term interests of the "organization". The CEO makes his short-term targets, collects his bonuses, and is out of there. The hollowed out organization becomes sick, and the regular employees and shareholders are left holding the short end of the stick.

If ways can be found to synchronize the long-term interests of the organization with those of the CEO and Management of the company, THEN these kinds of abuses would completely go away. Yes, companies will still fail: but it would be DESPITE the best efforts of the managers and not BECAUSE of their actions.

So, to Alan Greenspan, whom I respect greatly, I say: "That was the link you missed, my friend: confusing the Organization with its Management. They are not the same thing.”

Posted by: ThereAREWays | October 23, 2008 5:16 PM

Alan Greenspan has been an Ayn Rand-supporting, Objectivist, Libertarian Republican for many years. He is very adept at voicing words that are difficult to decipher. His words mean far less than his actions. His policies and decisions as the Chairman of the Federal Reserve ushered in this monstrous financial debacle! He has been every bit as responsible as Milton Friedman, Ronald Reagan, William F. Buckley and their ilk. All of these people have seen fit to erode, destroy, degrade and otherwise render ineffectual society's RIGHT to regulate the economy in the interest of the public!! John Kenneth Galbraith was correct all along, and the peple named above, and many more of their minions have been PROVEN incorrect. The PROBLEM is that the PUBLIC (the tax-paying citizens) are feeling the greatest pain and suffering. The profiteers have ridden off into the sunset with their millions! Greenspan tries to con the world into thinking that he made an innocent "miscalculation". In fact, American history is replete with thousands of examples of corporate/financial elites doing everything in their power to resist regulation of ANY sort. The results are always the same: the public gets raped, the elite get rich, and the weak pay the price. It's the foundation of unfettered greed and rapacity which characterizes our “economic system”. America is the most inegalitarian society in the entire First World...by DESIGN and PREMEDITATION!

Posted by: TrueFan1947 | October 23, 2008 5:27 PM

Unlike John Snow, Mr. Greenspan seems to have taken himself out of the analysis. He doesn't acknowledge the centrality of the Federal Reserve in inducing market behavior. This applies not only to the evaluation of risk by professional market participants, but most importantly for this melt-down, in the calculations of American families who by simply observing repeated official policy decisions could only conclude and trust that housing was the new central plank of spending.

Posted by: naderpi | October 23, 2008 5:49 PM

"John Kenneth Galbraith was correct all along, and the peple named above, and many more of their minions have been PROVEN incorrect. The PROBLEM is that the PUBLIC (the tax-paying citizens) are feeling the greatest pain and suffering."

Yes, but the public support for free for all markets, as evidenced by support for McCain, -is still very strong.

Public is losing their jobs, losing their houses, losing their 401's etc, but they are totally OK with that because the Joe Plumber and Joe Six-Pack have been sold the myth that regulation IS socialism by the extreme right.

Well, Greenspan has seen the light, I wonder if Phil Graham has? McCain has not so far, and Palin does not even have a clue.

Posted by: plaza04433 | October 23, 2008 5:54 PM

Greenspan, Snow and Cox have accepted their faults in running the financial institutions, which has created a economical tsunami. Now, can we make them responsible to pay for their faults? At least we can tell them to shut their dirty mouth and retire from the Public life for ever.

Posted by: citysoilverizonnet | October 23, 2008 6:29 PM

"Alan Greenspan has been an Ayn Rand-supporting, Objectivist, Libertarian Republican for many years."

As an Ayn Rand-supporting, Objectivist, Libertarian Republican myself, I can tell you for a fact that Greenspan had these views as a young man, but he certainly did not practice what Any Rand preached when he was older.

The truth of the matter is the root of this issue does not lie with Free Markets and deregulation which everybody loves to blame, but with the Federal Reserve and fractional-reserve banking. Go read pretty much anything from the Mises Institute (mises.org) and you will start to understand. When you have a monetary system that is totally backed by debt (fiat), and 15 men who met in private can manipulate the supply, then it is a system heading toward failure every time. Many different nations have tried this throughout the centuries and it always ends badly. At least Andrew Jackson had enough stones to get rid of the Second Bank of the United States (predecessor to the Fed) back in 1830. It is just too bad that it did not stay dead.

The answer to this problem is more regulation, just not on the businesses, but on the Fed.

Posted by: CadeThacker | October 23, 2008 6:55 PM

Biggest story at Waxman hearing missed .

Greenspan said the benefit from
Sarbanes-Oxley is it forced CEOs to sign off on financial statements. Any
other benefit? ``I'm hard pressed to find any others.''

Greenspan, when asked about Sarbanes Oxley "mark to market" FASB 157 today said he was hard pressed to see anything good about it other than CEO culpability for the audit.

Does the financial press WANT a depression ?
Stocks & ABX went lower because this was the last chance for Waxman & co to address the issue and do something other than,.. one question from one member on "mark to market" and a piss poor tepid response from someone who was once known as," the most powerful man on earth".
The House Committee had the Chairmen of the Federal Reserve, the SEC, the Treasury, CEO's of Moody's , Standard and Poor's & Fitch all on the hot seat and rather than engage in a solution they grandstanded as finger pointers and conspiracy theorists.

Sarbanes Oxley bill was political opportunism to declare a Jihad on the CEO class in 2002 which created the opposite effect and gave those CEO's a heightened risk thus enabling them to demand higher salaries and create short term business models and time horizons to pump up their companies' stock ,earnings and their stock options quick and leave before they were sued.

The middle class {765,558 foreclosures}, paid for Sarbanes class warfare gimmick gone sour.
The one thing we , Democrat , Republican, and Independent can all agree on , is that bureaucrats and politicians will never admit a mistake.

Both Sarbanes are from Maryland ,son protecting dads legacy, AICPA earmarks & turf on Waxmans' House committee


It was so , so very unnecessary and preventable that a reasonable person can only conclude that it was intentional.

http://www.markit.com:80/information/products/category/indices/abx/history_graphs.html


Posted by: rtfanning | October 23, 2008 7:10 PM

" " The PROBLEM is that the PUBLIC (the tax-paying citizens) are feeling the greatest pain and suffering. The profiteers have ridden off into the sunset with their millions!
Posted by: TrueFan1947 | October 23, 2008 5:27 PM " "

Tutt, Tutt, Now, now...you wouldn't want to punish the profiteers or their henchmen in the federal reserve who made these crimes possible, would you? After all they have apologized so they should now be allowed to keep the millions and even billions they have bilked out of the system, and which for which the tax-payers are now liable. So, pick up your crummy burden and continue to stagger under its weight. The rich in Amurica have a right to keep the riches and the poor should be happy to keep the rich in power. These are the rights of their respective classes. This is Amurica! Just ask the Right.

Posted by: yard80197 | October 23, 2008 7:45 PM

Alan Greenspan is acting like Mr. Bean in economy. Idiotic and exuberant.

Posted by: scooterlibre | October 23, 2008 7:45 PM

This is disgusting. You don't have a free market when you remove risk from the equation. If this was truly a free market situation, Greenspan wouldn't have been making trillions available at unnaturally low interest rates, Fannie and Freddie wouldn't have been there to guarantee the loans, and the Fed and the Treasury wouldn't be bailing the crooks out now. Of course these mortgage backed securities had AAA ratings. The mortgages were GUARANTEED by the government.

This is a key principle of free markets: keep the government from being in collusion with the private economy, so they are not able to use their power to rob everyone blind!

Lots of people saw this coming and warned about it. But instead of looking to them for the answers, we're now asking the very people who caused the crisis to give us solutions. And these people are telling us that the answer is to give them more control? The fox is guarding the hen house, and people are naive enough to think that the "regulators" will actually prevent their own selfish interests from being served.

I can't believe so many people are actually agreeing with this crook. He hasn't event admitted that his own actions were a prime cause of this mess. He's shifting the blame to everyone else.

People need to learn the difference between free markets and fascism. Otherwise they are all suckers. Hint: "Privatize the profits, socialize the losses" is NOT a tenet of free market economics.

Posted by: MrTracker | October 23, 2008 9:25 PM

A tidbit for Waxman and the Press: A mortgage company executive pushing pay-option arms (with a negative amortization feature) told me that Alan Greenspan was not only promoting them, but had one himself from their company on his own residence. I owned several businesses at the time, including a prime-only mortgage company. Notwithstanding Greenspan's alleged use of the product, I found it distasteful and refused to offer it through our company.

Posted by: timmurphyjd | October 23, 2008 9:49 PM

If there were any justice Greenspan would be spending a nice long stint in a Federal prison for the havoc he brought to the US economy. What he loves to call the "housing bubble" was really runaway inflation in a market sector. Inflation he could have easily squashed at any time by raising interest rates. My guess is that his buddies were making too much cash in the shady securities market.

Posted by: MarcMyWords | October 23, 2008 10:25 PM

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