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 in 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. Since then, the market for subprime mortgage debt has virtually vanished.

The Fed utterly failed to prevent the financial crisis, said commission member Brooksley Born at a hearing where Greenspan, other regulators and banking executives testified.

In reply to Born and other commission members, Greenspan, who is 84 and 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 a senior vice president at CitiMortgage Inc.

He said he e-mailed former U.S. Treasury Secretary Robert Rubin, then chairman of Citigroup's executive committee, 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 out 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 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.

(For a Factbox on Senate Banking Committee Chairman Christopher Dodd's bill, double-click on [ID:nN15206128])

President Barack Obama, building on his healthcare reform victory, is targeting fast action on financial reform.

Everyone gets the urgency of this, two years on. I think they get it on the Hill. I think they get it in the business community, Neal Wolin, deputy secretary of the U.S. Treasury, told a White House briefing on Wednesday.


Obama is expected to push regulatory restructuring as his top domestic priority when Congress returns on Monday from its Easter vacation. Administration officials said a bill could get through the Senate and to the White House by late May.

The question of Wall Street executive pay surfaced at the hearing, with commission Vice Chairman Bill Thomas grilling former Citigroup executive Thomas Maheras over the tens of millions of dollars he made while working there.

You made a lot of money. Do you believe now, looking back on that situation, that you earned all of it? Thomas asked.

Maheras said he was paid very handsomely, but that it was consistent with market norms and reflected Citi's strong performance, at least until 2007 when he got no bonus.

Maheras was co-CEO of Citi Markets & Banking when he left the firm in October 2007. A year later, the U.S. government had to pump $45 billion into Citi to keep it from collapsing, in part because of problems with collateralized debt obligations, a business line Maheras was closely involved with.

I did lose a lot of sleep, Maheras said, adding though that Citi's big losses came after he had left the firm.

Thomas said, But you were there as part of the problem.

Maheras said, I was.

The Senate bill ranges across many topics, including the problem of Wall Street executives receiving huge paychecks, even when their firms lose money, and the issue of how to fix the broken 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 fees and profits in the process.


At the commission hearing, Patricia Lindsay, a former executive at mortgage firm New Century Financial Corp, made clear her view about 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.

The SEC, addressing such concerns, on Wednesday proposed making mortgage-backed securities issuers disclose more about underlying loans and keep 5 percent of the 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, Matt Spetalnick and Alister Bull in Washington, with Steve Eder and Dan Wilchins in New York; Editing by Jan Paschal)