Long before the financial crisis claimed headlines, U.S. regulators and law enforcement officials had begun sounding alarms about dangerous lending practices and Wall Streetâs headfirst jump into the subprime market. Some were brushed off by their superiors. Others led agencies like the Federal Deposit Insurance Corporation and the Treasuryâs Office of Thrift Supervision, which at least one lawmaker has accused of acting sluggishly to avert the crisis.
Ellen Seidman, former director of the Treasuryâs Office of Thrift Supervision, testified in that capacity before the House Committee on Banking and Financial Services on February 8, 2000 that her office had warned repeatedly of the risks of subprime lending: âSubprime lending, which involves lending to borrowers who have a significantly higher risk of default based on their credit repayment history, has been the subject of intensive OTS scrutiny by our policy and supervisory staff for several years. We started sounding warnings about risks arising from this lending activity as early as June 1998.â
Edward Gramlich, a Federal Reserve BoardGovernor from 1997 until 2005 andauthor of the book Subprime Mortgages: Americaâs Latest Boom and Bust said he urged Alan Greenspan in 2000 to use the power of the Federal Reserve to crack down on subprime mortgage lenders: âI would have liked the Fed to be a leader,â in regulating the practice, he told The Wall Street Journal before his death in September 2007. âHe was opposed to it, so I didnât really pursue it.â Greenspan said later that he didnât recall the conversation.
In the many public statements Gramlich made about subprime lending in 2000, he focused mainly on the harm of predatory lending to homeowners, rather than the risk to the credit market. "These practices â¦ can result in consumers losing much of their equity in their home, or even the home itself," Gramlich said in 2000 while putting forward a Federal Reserve proposal for a modest strengthening of regulation.