TORONTO (Reuters) - Wall Street regulators ignored clear signs of the dangers posed by “ridiculous” mortgage innovations and the proliferation of complex securities that led to the current financial unrest, Former Bank of Canada Governor David Dodge said.
In an interview with The Globe and Mail newspaper published on Friday, Dodge said former Federal Reserve Chairman Alan Greenspan, had repeatedly warned in private that the overheated U.S. housing market could lead to disaster. But regulators failed to act.
“It was very hard to get reform because there was the perception that if you make mortgages more accessible, you are helping homeowners,” Dodge said. “But what you are really doing is driving up home prices.”
Dodge has kept a low profile since he retired as central bank chief seven months ago.
He said mortgage-backed securities allowed banks to take risky loans off their balance sheets so they would not have to set aside reserves. That shifted billions of dollars of potentially risky investments into unsupervised markets.
As a solution, he recommended more centralized regulation, including greater transparency and more rigorous accounting standards. He said investment firms ought to comply with the same type of credit and capital rules as retail banks.
Reporting by Frank McGurty; editing by Janet Guttsman