The wreckage of Wall Street's subprime mortgage machine was laid bare on Wednesday by a U.S. congressional panel that pointed the finger at Alan Greenspan for not stopping it from running out of control.

The former Federal Reserve chairman -- once revered as the oracle of economic wisdom -- defended his legacy before the panel, which also heard a former Citigroup executive say he had warned of the subprime danger.

The Financial Crisis Inquiry Commission kicked off three days of hearings with a look at securitization of subprime mortgages, in which risky home loans were bundled and resold onto the secondary debt market.

At the peak of America's real estate bubble, Wall Street firms were securitizing huge amounts of subprime loans, putting bad assets on financial institutions' books and unmanageable debts on the shoulders of many homeowners.

It all came crashing down two years ago, triggering a devastating wave of foreclosures, paralysis in capital markets, and the worst financial crisis in generations. The market for subprime mortgage debt has since virtually vanished.

The Fed utterly failed to prevent the financial crisis, said commission member Brooksley Born at a hearing in which Greenspan testified.

In reply to Born and other commission members, Greenspan, who is 84 and who retired as Fed chairman in 2006, said:

Did we make mistakes? Of course we made mistakes ...

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 2007-2009 crisis.


But former Citigroup executive Richard Bowen told the panel that he alerted senior managers to the dangers.

I warned extensively of the scope of the problems identified, beginning in June 2006, said Bowen, formerly business chief underwriter at CitiMortgage Inc.

He said he e-mailed former U.S. Treasury Secretary Robert Rubin, then chairman of Citigroup's executive committee, and other executives in November 2007 warning of the risks of loss to the shareholders of Citigroup. He said he also requested an investigation.

More on this will come on Thursday, when the commission is scheduled to hear from Rubin himself, as well as former Citigroup CEO Chuck Prince. The government pumped $45 billion in emergency capital into Citigroup during the crisis.

On Friday, the commission will hear from former executives and regulators of housing finance giant Fannie Mae .

The commission's hearings were not expected to unearth revelations that significantly alter the tale of the crisis, which is fairly well understood by now. But its proceedings could add momentum to a push for a regulatory overhaul.

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.

The U.S. House of Representatives approved a sweeping financial reform bill in December. The Senate will begin debate soon on legislation backed on March 22 by a key committee.

President Barack Obama, building on his healthcare reform victory, is making financial reform a top objective. A White House briefing on the issue was scheduled for Wednesday.

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.


The Senate bill ranges across many topics, including how to fix the securitization business. Critics have accused loan originators, bundlers and others along the securitization chain of undermining loan discipline, obscuring risks behind complex debt structures and reaping huge profits in the process.

At the commission hearing, Patricia Lindsay, a former executive at mortgage firm New Century Financial Corp, made clear her view on which end of the complicated subprime mortgage securitization chain drove its expansion.

The growth in the subprime industry grew because of the securitizations on Wall Street ... Loans were just sold in droves to Wall Street. There was a huge demand for the product ... because of the returns, she said.

Addressing such concerns, the SEC on Wednesday proposed forcing issuers of mortgage-backed securities to disclose more about underlying loans and keep 5 percent of the credit risk in some cases.

In related news, Goldman Sachs rebutted allegations on Wednesday that it had benefited unduly from government help and bet against its own clients during the crisis.

The Wall Street firm said in its annual shareholder letter that it did not intentionally bet against securities in the mortgage market during the crisis, dismissing suggestions that it unfairly made money by placing bets against its clients.

(Additional reporting by Corbett Daly, Rachelle Younglai and Alister Bull in Washington and Steve Eder in New York; Editing by James Dalgleish)