Fed's
Role and Investment Banks: Subprime Market
(Videos below)
First
Business Morning News
March 19, 2007
>>VIDEO:
The Fed's Role in the Subprime Market - March 19,
2007
Janet Tavakoli appeared on First Business Morning News on March 19, 2007 and
remarked that many news services seem confused about the role of the regulators
in the subprime market.
She noted that the Federal Reserve
does not regulate mortgage brokers; the states have authority. Several states
have issued
cease-and-desist orders against New Century Financial Corp.
“All eyes are on Ohio.” Attorney General Marc Dann,
alleging fraud on borrowers, “didn’t just throw out
the New Century carpetbaggers.” New Century cannot originate
new mortgages, cannot collect fees, cannot foreclose, and cannot
evict consumers.
She said this will make it difficult for investment banks and
others that did business with New Century to recover losses.
The
Fed “could have exerted more influence [with banks
that extended credit lines to mortgage brokers and securitized
subprime assets] but didn’t.”
The
Fed was “complacent” about the mispriced risk.
She cited Alan Greenspan’s April 2005 speech in which he
said that the banks knew how to model the risk and had created
opportunities for subprime borrowers. But he failed to take into
account predatory lending practices and potential fraud on borrowers
[despite precedents such as the First Alliance Mortgage Company
(“FAMCO”) fraud on borrowers in 2000]. She noted
that he has since “changed his tune.”
“… lenders are now able to quite efficiently judge
the risk posed by individual applicants and to price that risk
appropriately. These improvements have led to rapid growth in
subprime lending…”
Alan Greenspan
April 8, 2005
Federal
Reserve System’s
Fourth Annual Community Affairs Research Conference
Washington, D.C.
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