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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