Alan Greenspan -- once revered as the oracle of economic wisdom -- defended his now deeply flawed legacy on Wednesday before a U.S. panel investigating the origins of the 2007-2009 financial crisis.
As Senate aides worked behind the scenes to hammer out a bill tightening bank regulation, the Financial Crisis Inquiry Commission hammered on Greenspan at the first of three days of hearings that could sharpen the financial reform debate.
Greenspan, 84, chaired the U.S. Federal Reserve for nearly two decades. He testified before the 10-member commission in his usual scholarly manner, carefully parsing his answers.
Did we make mistakes? Of course we made mistakes, he said. Managers of financial institutions, along with regulators, including but not limited to the Federal Reserve, failed to comprehend the underlying size, length and potential impact of market risks that contributed to the crisis.
The panel will question former top executives of bailed-out banking group Citigroup
The former Fed chairman is accused of naively confiding in markets to self regulate and use complex financial instruments to protect themselves from a huge increase in leverage and risk taking caused by excessively low interest rates.
The hearings were not expected to unearth stunning revelations about the causes of the worst banking and capital markets debacle since the Great Depression, but they could add momentum to the Democrat's push for a major regulatory overhaul.
Poor performances by senior industry or government officials could alter the political dynamic for financial reform, said policy analyst Jaret Seiberg at Concept Capital.
The House of Representatives approved a sweeping reform bill in December. The Senate is on track to begin formal debate this month on legislation that was backed in a March 22 party-line vote by the Senate Banking Committee.
WHITE HOUSE BRIEFING AHEAD
President Barack Obama, building on his healthcare reform victory, is making financial regulation a top objective. A White House briefing on the issue was scheduled for Wednesday.
The Obama administration is expected to push regulatory restructuring legislation as its top priority when Congress returns in mid-April from its Easter break, said Brian Gardner , policy analyst at Keefe Bruyette & Woods.
As the commission hearings began, Senate staffers were working quietly to try to bridge differences over consumer protection, regulation of over-the-counter derivatives and other matters central to the banking committee's bill.
Republicans and lobbyists for the banking industry and Wall Street have been working for months to water down the Democratic bill, which cleared the committee with no Republican support. The House bill also won no Republican votes.
Democrats are betting that Republicans will agree to a bill, given certain compromises, as they look ahead to November's congressional elections and move to distance themselves from the deeply unpopular financial industry.
Ultimately, we expect the financial reform bill gets passed in a bipartisan way before Memorial Day on May 31, said Paul Miller, policy analyst at FBR Capital Markets.
GREENSPAN DEFENDS LEGACY
At the commission hearing, Greenspan reiterated a defense of his actions by denying the Fed helped inflate housing prices with excessively low interest rates.
The commission, set up by Congress, must make a final report by December 15. It was modeled on the Pecora Commission, which probed the 1929 stock market crash and the Great Depression, producing revelations that led to the creation of the Securities and Exchange Commission and other reforms.
Much of Greenspan's testimony retraced old ground, but the former Fed chairman also weighed in on reforms, calling for higher bank capital and liquidity standards.
Echoing concerns voiced by both parties on Capitol Hill, he also said it was highly disturbing that markets expect bailouts for large financial firms that get into trouble.