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While former Federal Reserve Chairman Alan Greenspan defiantly defended his record this week before the panel investigating the financial crisis, one admission that went largely unnoticed was his acknowledgment of the existence of fraud.
During his tenure atop the Fed, Greenspan didn't believe in it, according to published reports. As Michael Greenberger, former director of trading and markets at the Commodity Futures Trading Commission where he served under current Financial Crisis Inquiry Commissioner Brooksley Born, put it in a PBS "Frontline" interview:
"When I went to work with [Born] and she was telling me, 'This is what you're up against,' she told me that she had had this lunch with Alan Greenspan, and he had said to her probably that she and he were going to have a disagreement about something, and the subject was fraud. And he didn't believe that fraud was something that needed to be enforced or was something that regulators should worry about, and he assumed she probably did. And of course she did. I've never met a financial regulator who didn't feel that fraud was part of their mission, but that was her introduction to Alan Greenspan."
This week, in response to a question from Financial Crisis Inquiry Commissioner Heather Murren, who asked Greenspan whether subprime lenders should now be supervised by the Federal Reserve, Greenspan said:
"Well, first of all, remember you have to distinguish between supervision and enforcement. A lot of the problems which we had in the independent issuers of subprime and other such mortgages, the basic problem there is that, if you don't have enforcement, and a lot of that stuff was just plain fraud, you're not coming to grips with the issue."
In a paper on the financial crisis he presented last month at the Brookings Institution in Washington, Greenspan did not mention the word "fraud", in any of its forms, even once in the 66-page presentation.
His prepared remarks this week, though, mentioned it three times.
"[I]t is one thing to promulgate rules, and quite another to successfully implement them. Rules to prevent fraud and embezzlement have failed as often as not. Parenthetically, in the years ahead, we will need far greater levels of enforcement against misrepresentation and fraud than has been the practice for decades," he told the investigatory panel.
Greenspan also called for "enhanced" enforcement against "misrepresentation and fraud" going forward as one desired part of the government's arsenal in trying to avoid future crises in which taxpayers are forced to bail out private companies.
In addition to his acknowledgment of fraud, Greenspan also provided a back-handed endorsement of the proposed consumer financial protection agency. The proposed agency, designed to protect borrowers from predatory lenders, has been the subject of intense political debate in the fight to reform the financial system.
Some members of Congress want to keep consumer protection authority with federal bank regulators, or give those regulators power to keep overzealous consumer protectors at bay. A proposal by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) would place the unit inside the Fed.
But the Fed isn't equipped to handle it, Greenspan testified this week.
"The Federal Reserve, remember, is not an enforcement agency," he told the panel. "It would require a very significant set of revisions with respect to how our supervision and examination force...
"Remember, what the Federal Reserve examiners are are largely experts in examining concentration of assets, bookkeeping -- a whole set of issues that relate to how banks work and how banks work in an effective manner.
"It's not a group that can ferret out embezzlement, fraud, misrepresentation -- and indeed, when we get such examples, what we tend to do is recognize that we don't have the facilities."
WATCH Greenspan testify below: