NEW YORK (CNNMoney.com) -- Alan Greenspan acknowledged Wednesday that mistakes were made during his long tenure as chairman of the Federal Reserve, but he argued that the low interest rate policy he championed at the central bank didn't inflate the housing bubble.
In testimony before the Financial Crisis Inquiry Commission, Greenspan said the recent financial meltdown was possibly "the most severe in history." He admitted that regulators failed to grasp the severity of the crisis, but he maintained that his policies and predictions were correct most of the time.
"When you've been in government for 21 years, as I have been, the issue of retrospect and what you should have done is a really futile activity," Greenspan said. "I was right 70% of the time. But I was wrong 30% of the time, and there were an awful lot of mistakes in 21 years," he added.
Greenspan, who was chairman from 1987 to 2006, has been criticized for not increasing the Fed's benchmark interest rate in time to prevent the housing market from becoming overheated. The housing bubble eventually burst in 2008, giving rise to a wave of foreclosures, which roiled the financial markets and plunged the economy into a deep recession.
The commission, which was established last year to examine the causes of the financial crisis, is hearing testimony this week from a number of former federal officials, bankers and mortgage industry executives about the near collapse of the housing market.
The hearings are aimed at exploring how the issuance of trillions of dollars worth of risky subprime mortgage debt contributed to the financial meltdown. Specifically, the commission wants to explore the Federal Reserve's authority to regulate unfair and deceptive mortgage practices.
In response to a question from commission chairman Phil Angelides about why the Fed did not move faster to contain the spread of subprime lending, Greenspan said the central bank has limited power to enforce regulations, adding that he did take steps to protect consumers from predatory lending.
"We did do almost all of the things that you are raising," Greenspan responded. "And the consequence of that, I think, is that things were better than they could have been."
Greenspan said the subprime mortgage crisis had its root in the securitization of risky home loans into assets that were divided and sold around the world. He said the market for such securities ballooned to more than $900 billion by 2007 due mostly to strong demand from overseas investors.
The former chairman said investors' strong appetite for mortgage-backed securities artificially boosted home prices. He said government-sponsored enterprises, such as mortgage lenders Fannie Mae and Freddie Mac, also contributed to the spread of subprime loans.
Greenspan also blamed banks for relying too heavily on the flawed judgment of credit ratings agencies to assess the value of mortgage-backed securities and dropping the ball when it comes to risk management.
While there is no way to fully prevent another crisis from happening, Greenspan argued that increased capital and collateral requirements for financial institutions could help mitigate risks and safeguard the system.
"We did not have enough capital in the system to contain the type of crisis that happens, in my judgment, once in a hundred years," he said.
Greenspan also said regulators could do more to prevent predatory lending and address threats posed by institutions that are considered too big to fail.
In addition to Greenspan, the 10-member commission heard testimony on supbrime mortgage origination and securitization from current and former executives at Citigroup (C, Fortune 500), which received a $45 billion taxpayer bailout after suffering huge losses tied to its investments in mortgage backed securities.
Richard Bowen, former senior vice president at CitiMortgage Inc., the bank's underwriting arm, told the commission that he raised red flags about the quality of the mortgage pools the bank was investing in.
Bowen said he sent an e-mail to members of Citi's corporate management, including Robert Rubin, then chairman, in 2007.
"In this e-mail, I outlined the business practices that I had witnessed and attempted to address," Bowen testified. "I specifically warned about the extreme risks that existed within the Consumer Lending Group."
Under questioning, Bowen said he received a "very brief phone call" from one of the bank's lawyers shortly after he sent the e-mail.
He sent two follow up e-mails, but was not contacted until late the following year. When asked if Citi had taken any action based on his warning, Bowen, who left the company in 2009, said he didn't know.
Susan Mills, who has run the mortgage finance group at Citi's investment banking division since 1999, defended the bank's efforts to ensure the mortgages it invested in were sound.
"Our due diligence review served as the primary -- and I believe highly effective -- means by which we evaluated the loans that we purchased and securitized," she said.
While those practices failed to detect the "unprecedented" downturn in home prices, Mills argued that securitizing and selling home loans to investors is a safe and effective way to facilitate homeownership.
"I continue to believe, despite the financial crisis and the collapse of residential home prices, that securitization of non-agency mortgages plays a vital role in making capital available to institutions to enable individuals to purchase homes," she said.
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