`I made a mistake,' admits Greenspan

By Alan Beattie and James Politi in Washington

Published: October 23 2008 17:37 | Last updated: October 23 2008 21:26

Alan Greenspan, the former Federal Reserve chairman, said on Thursday
the credit crisis had exceeded anything he had imagined and admitted
he was wrong to think that banks would protect themselves from
financial market chaos.

"I made a mistake in presuming that the self-interest of
organisations, specifically banks and others, was such that they were
best capable of protecting their own shareholders," he said.

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22Credit agencies `broke bond of trust' - Oct-22In the second of two
days of tense hearings on Capitol Hill, Henry Waxman, chairman of the
House of Representatives, clashed with current and former regulators
and with Republicans on his own committee over blame for the
financial crisis.

Mr Waxman said Mr Greenspan's Federal Reserve – along with the
Securities and Exchange Commission and the US Treasury – had
propagated "the prevailing attitude in Washington... that the market
always knows best."

Mr Waxman blamed the Fed for failing to curb aggressive lending
practices, the SEC for allowing credit rating agencies to operate
under lax standards and the Treasury for opposing "responsible
oversight" of financial derivatives.

Christopher Cox, chairman of the Securities and Exchange Commission,
defended himself, saying that virtually no one had foreseen the
meltdown of the mortgage market, or the inadequacy of banking capital
standards in preventing the collapse of institutions such as Bear
Stearns.

Mr Waxman accused the SEC chairman of being wise after the event. "Mr
Cox has come in with a long list of regulations he wants... But the
reality is, Mr Cox, you weren't doing that beforehand."

Mr Cox blamed the fact that congressional responsibility was divided
between the banking and financial services committees, which regulate
banking, insurance and securities, and the agriculture committees,
which regulate futures.

"This jurisdictional split threatens to for ever stand in the way of
rationalising the regulation of these products and markets," he said.

Mr Greenspan accepted that the crisis had "found a flaw" in his
thinking but said that the kind of heavy regulation that could have
prevented the crisis would have damaged US economic growth. He
described the past two decades as a "period of euphoria" that
encouraged participants in the financial markets to misprice
securities.

He had wrongly assumed that lending institutions would carry out
proper surveillance of their counterparties, he said. "I had been
going for 40 years with considerable evidence that it was working
very well".

Republicans on the committee dissented from some of the Democratic
attacks, and said the government-backed housing entities Freddie Mac
and Fannie Mae had also been to blame.

"It wasn't deregulation that allowed this crisis," said Tom Davis,
the senior Republican on the committee. "It was the mish-mash of
regulations and regulators, each with too narrow a view of
increasingly integrated national and global markets."

Mr Greenspan said that when, as Fed chairman, he declined to advocate
regulating credit default swaps – derivatives that have been blamed
for worsening the crisis – he had been following the will of Congress.