Greenspan's culpability: Part 3

Angered by Alan Greenspan’s claim that the Fed was faultless in the housing bubble and financial crisis, I’ve already posted two sets of reasons Greenspan bears substantial culpability. Here’s another, from The New York Times‘ Edmund Andrews. He wrote “Fed Shrugged as Subprime Crisis Spread” in December 2007:

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

That Greenspan rebuffed Fed Board member Gramlich is especially abominable. After Gramlich told Greenspan exactly what was wrong (systemic predatory lending and heavy use of teaser interest rates) and would soon ruin much of the financial industry, Greenspan yawned:

What alarmed Mr. Gramlich was that many subprime loans were extremely complicated and loaded with hidden risks.

Borrowers were being qualified for loans based on low initial teaser rates, rather than the much higher rates they would have to pay after a year or two. Many of the loans came with big fees that were hidden in the overall interest rate. And many had prepayment penalties that effectively blocked people from getting cheaper loans for two years or longer.

“Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked in a speech he prepared last August for the Fed’s symposium in Jackson Hole, Wyo. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.”

Posted by James on Saturday, March 14, 2009