The Financial Crisis Inquiry Commission is holding a public hearing from April
7-9, 2010. The topic is "Subprime Lending and Securitization and Government-Sponsored
The Commission subpoenaed former Federal Reserve Chairman Alan Greenspan,
among others. He is scheduled to appear on Wednesday April 7, 2010, at 9 AM.
(The FCIC website has a notice of all those scheduled to appear.)
Frederick Sheehan sent a letter to each of the ten members of the Commission
along with his book, Panderer
to Power. As the letter (more or less) states, Chapter 22 names the
smorgasbord of parties who profited from the subprime crisis and how they were
connected to each other. Round 'em up.
The letter below is to the chairman of the committee, Mr. Phil Angelides.
Frederick J. Sheehan
April 1, 2010
Mr. Phil Angelides, Commission Chairman
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW
Washington, DC 20006-4614
Dear Chairman Angelides:
I am writing in regard to the Financial Crisis Inquiry Commission's April
7-9, 2010, public hearing, "Subprime Lending and Securitization and Government-Sponsored
Enterprises (GSEs)." Specifically, the following is written to help you examine
Enclosed please find a copy of my book, Panderer to Power: The Untold
Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession.
I am also co-author of Greenspan's Bubbles: The Age of Ignorance at
the Federal Reserve.
In preparation for writing these books, I read ten years of Federal Reserve
Open Market Committee (FOMC) transcripts, Congressional and Senate testimony
over the same period, and Chairman Greenspan's speeches, interviews and articles
that he wrote back to 1959 (New York Times, Wall Street Journal, Fortune,
U.S. News and World Report, Newsweek, Time and others). I have followed
much of his public self-vindication since his retirement from the Federal
This letter addresses three areas. First, Alan Greenspan and the Government-Sponsored
Enterprises (GSEs). This includes how the GSEs changed the American economy.
Second, Alan Greenspan's promotion of toxic mortgage products. Third, the
Federal Reserve's influence on the topics you are addressing on April 7-9.
Although the role of the Federal Reserve is not, per se, the subject
of the April 7-9 hearing, the Fed prints the nation's money and, for the
most part, has the ability to limit the amount of credit in the economy.
1 - Alan Greenspan and the Government-Sponsored Enterprises
Alan Greenspan deserves recognition for his attempts to harness Fannie Mae
and Freddie Mac. His first warning about the GSEs explosive growth was on
February 24, 2004, before the U.S. Senate Committee on Banking, Housing,
and Urban Affairs. He also urged reform at a conference sponsored by the
Federal Reserve Bank of Atlanta on May 19, 2005. I quote and discuss the
importance and timing of these warnings on pages 266-270 of my book Panderer
I think Alan Greenspan should explain to you why he waited until 2004 before
issuing his first warning. If he is asked this question directly, Greenspan
will state you are incorrect. He may cite a previous occasion or occasions
when he issued such advice. If so, the speech or testimony should be read.
This advice applies to any topic.
Chapter 22 of Panderer to Power lays out the reason I would ask why
he waited until 2004. Without GSE expansion, the home mortgage market could
not have grown to dominate the U.S. economy. (Northern Trust estimated that,
between 2001 and 2006, 40% of new jobs were related to housing.) Fannie and
Freddie were vacuum cleaners for the nation's mortgage finance growth. In
1995, home mortgage debt increased by $153 billion; in 2000, by $380 billion;
in 2005, by $1.1 trillion.
In 1990, the value of Fannie Mae's and Freddie Mac's combined mortgage portfolio
was $132 billion. In April 2003 - a single month - Fannie Mae (alone) bought
$139 billion of mortgages. The mutation of Fannie and Freddie played a large
role in the mutation of the U.S. economy.
Chapter 22, "The Mortgage Machine," integrates the parties who contributed
to the housing wreckage: the non-bank mortgage companies, the commercial
banks (writing and selling mortgages) the investment banks (securitizing
mortgages and funding the growth of the non-bank mortgage companies), the
GSEs (packaging mortgage securities and funding subprime lenders, banks and
non-banks), the Office of Federal Housing Enterprise Oversight (which mishandled
its role as GSE supervisor), members of Congress (who prevented OFHEO from
performing its function), the Securities and Exchange Commission (which removed
the 12:1 leverage limit on brokerage houses and allowed Lehman Brothers -
among others - to expand their mortgage and mortgage-security holdings to
a leverage ratio of over 30:1), technology (derivatives, accounting, and
the ability to process loan requests in 12 seconds) and the negligence of
all of the government agencies with authority over financial institutions
(widespread fraud was front page news in the Wall Street Journal in
2001.) This is only a partial list of the parties discussed in Chapter 22.
In Panderer to Power, my exploration of the housing bubble veers
towards the earlier years, 2001-2003. I did this to show that someone in
a position of authority who picked up the morning newspaper had to know the
Mortgage Machine should be reined in. Aside from fraud, the terms of loans
and the incapacity of home buyers to pay their mortgages was a common newspaper
topic by 2002. (I quote some of these in my book.)
I chose this emphasis after hearing Alan Greenspan state on 60 Minutes (October
3, 2007): "While I was aware a lot of these practices were going on, I had
no notion of how significant they had become until very late. I really didn't
get it until very late in 2005 and 2006."
You might expect this sort of answer on April 7. It is not credible.
The absurdities in the housing market were already a source of laughter
at FOMC meetings in 2002. On November 2, 2002, Atlanta Federal Reserve President
Jack Guynn told the FOMC: "The south Florida housing market would have to
be characterized as red hot. One director reported that when a moderately
priced development on the west coast of Florida opened, demand was so great
that sales had to be limited to three homes per customer. That's a semi-true
2 - Alan Greenspan Used his Position to Sell Toxic Mortgage Products
More important than his knowledge was how Greenspan used his testimony and
speeches to sell the mortgage bubble. I will restrict my discussion to two
of his sales talks.
On February 23, 2004, Greenspan spoke to the National Association of Homebuilders.
He claimed the "traditional fixed-rate mortgage may be an expensive method
of financing a home" and "[m]any homeowners might have saved tens of thousands
of dollars had they held adjustable-rate mortgages rather than fixed-rate
mortgages over the past decade."
Greenspan will deny this speech influenced the mortgage market. It did.
He was still a demigod to a large part of America. The title of an article
in the February 24th Wall Street Journal read: "Fed Chief Questions
Loan Choices." Quoting the first sentence of the story: "In a rare evaluation
of the interest rate options that households face, Federal Reserve Chairman
Alan Greenspan questioned whether homeowners are well-served by popular fixed-rate
long-term mortgages." Realtors quoted Greenspan in their sales materials.
Adjustable-rate mortgages rose from 2% of mortgages in California in 2002
to 47% in 2004 to 61% in 2005. It is a fair though unanswerable question
how much Greenspan contributed to the current fiscal problems in California.
Alan Greenspan has run away from this speech since retirement. Here is an
excellent example of how he will dodge responsibility when he appears before
the Financial Crisis Inquiry Commission.
An interviewer questioned Alan Greenspan about his February 23, 2004 speech
at a January 2008 conference in Canada. Greenspan told the interviewer "I
strongly clarified my remarks" regarding adjustable-rate mortgages in a speech
on March 2, 2004 and "[s]o I plead not guilty." The transcript of the March
2, 2004, speech to the Economic Club of New York shows no mention of mortgages.
He may have discussed adjustable-rate mortgages after the speech, but this
certainly did not clarify his remarks to the public.
Greenspan made another attempt to extricate himself in February 2008. Greenspan
told an audience in Sweden his warning (or retraction or however he planned
to style it) was not in New York but in Chicago on May 6, 2004. This trail
was not worth pursuing.
When he responds to your questions in like fashion, the transcript of his
original remarks should be read.
Another of Greenspan's speeches worth reviewing is an address to the American
Bankers Association on September 26, 2005. By this late date, it was not
enough to encourage adjustable-rate mortgages. To sell mortgages, and feed
the Mortgage Machine, Chairman Greenspan discussed "a long list of novel
mortgage products" such as 40-year loans, option ARMs, piggyback mortgages
and HELOCS used as piggyback loans. Greenspan told his listeners he was not "worr[ied]
that homebuyers are especially exposed to reversals in house prices."
This was quite a conclusion since he also told the American Bankers Association: "We
can have little doubt that the exceptionally low level of home mortgage interest
rates has been a major driver of the recent surge of home building and home
turnover and the steep climb of home prices."
It seems likely that the nation's leading banking regulator made these speeches
before the National Association of Homebuilders and the American Bankers
Association for a reason. Builders and bankers received Greenspan's implicit
encouragement to continue to build and to lend.
3 - The Federal Reserve is Cause, Not Effect, for Abuses in Subprime Lending
There would have been no lending of any sort without the Federal Reserve.
The Fed prints the money that enters the economy. It has a monopoly. Counterfeiters
Credit springs from money. The commercial banking system produces credit,
by and large. The Federal Reserve sets reserve requirements on commercial
bank credit growth. If the Fed sets the bank reserve ratio at 10:1, a bank
cannot lend more than $10 for every $1 on deposit. That effectively limits
the growth of credit.
The Federal Reserve has the authority to increase or decrease bank reserve
requirements at any time. During Alan Greenspan's chairmanship, the Fed reduced
bank reserve requirements several ways; it never increased them. The result
of the Greenspan Fed's money and credit expansion: commercial banks, having
run out of proper projects to fund, lent to investment banks, hedge funds,
private-equity funds, subprime mortgage lenders, and commercial property
speculators. (An investment bank may have lent to a non-bank mortgage company,
but it first had to borrow from the commercial banking system.)
The Federal Reserve, under Alan Greenspan, both printed every dollar that
entered the economy and had sole authority to set bank reserve requirements.
If the Fed had reduced reserve requirements, this would have restricted the
lending that proved so destructive.
I would anticipate a rebuttal from Alan Greenspan. He spent his Federal
Reserve chairmanship distracting committees by turning money and credit into
a quagmire of confusion. There is, of course, much more than I have written
above for a full understanding of money and credit, but Alan Greenspan will
not attempt to enlighten the commission. The paper he recently presented
at the Brookings Institute was a grab bag of unrelated hypotheses that never
mentioned the relationship between the Federal Reserve, money and credit.
The role and influence of the Federal Reserve can be explained in plain English.
He may attempt to respond to questions of money and credit with another
argument, which could be phrased as follows: "We live in a global economy
with a global financial system. The Federal Reserve does not have as much
control as you claim." This is a specious argument. In reality the dollar
is still the world's reserve currency. As the world's reserve currency, it
is only the United States that can print money in any quantity it so desires.
Greenspan has attempted to dodge his responsibility as Fed chairman by talking
about housing bubbles in twenty different countries. No, there was a housing
bubble in the United States that we exported by printing money that was then
shipped overseas to pay for goods. When these dollars were converted into
local currencies, the excess credit led to the twenty housing bubbles.
I hope my letter is of service. Please let me know if I can offer instruction
or advice, either for the current or later hearings.