>> up next gretchen morgenson and joshua rosner talk about the 2008 u.s. financial collapse and the role played by lending and mortgage companies fannie mae and but. this lasts about an hour. >> thank you so much, david. ..

>> from interviewers, buyers of the book, e-mail in my e-mail account at the times. what surprised you the most about your reporting and the investigation that you both did to come out with this book? we all know that there have been a lot of books about the financial crisis. many of them recount the events during the crisis in the heat of the panic of 2008. some of them go back a little bit further in time to describe some of the groundwork that was laid to create the crisis. but josh and i decided to go back much farther, into the early '90s, to really tell the tale. because a debacle this large really didn't happen overnight. and unlike some of the books' conclusions, other books' conclusions that it was nobody's

fault, sort of a series of events that could not be helped, we really believe that there were actual parties involved laying the groundwork. but as far as what has been most surprising to me in this exercise is the number of paradoxes that emerge from this story. the paradox of powerful participants in the events leading up to the crisis who continue to this day to be in position of power or are even in positions of greater power than they were. a second paradox, that trillions of dollars of losses being endured by investors and borrowers, yet no one involve inside the mess -- involved in the mess being held accountable. but to me the most perplexing paradox of all is this: how did it happen that the drive to

expand the rate of home ownership to first-time home buyers, many of them minorities, immigrants, and other lower income individuals, how did it happen that this partnership, this push wound up trapping them in loans that they could not afford and putting them squarely on the road to financial ruin? in other words, how did the dream of home ownership become such a nightmare for so many first-time home buyers? it's really an awful paradox when you think about it. government officials and the belief that home ownership was a win/win for everyone opened the door to predatory lenders who lured the least sophisticated people into the most poisonous loans. these included loans with prepayment penalties of high interest, prepayment penalties

or high interest rates. a report by the center for responsible lending looked at 1.8 million loans in the early 2000s. it showed that from 2000 to 2004 borrowers in minority neighborhoods received a disproportionate number of loans with prepayment penalties. the center found that borrowers living in zip code areas where more than half of residents represented minority groups, the odds of receiving prepayment penalties were 35% higher than those of similarly-situated borrowers in zip codes where minorities comprised less than 10% of residents. the study controlled, importantly, for key borrower property and loan characteristics such as borrower credit scores to insure that the results were not, repeat not, based on differences in risk factors. now, we move on to the apex of

the boom, and the center made another study of 177,000 loans in 2006, and it concluded that the odds of receiving a higher rate, fixed rate purchase loan were 71% greater for african-americans than for whites. african-americans in the sample were 15% more likely to receive a higher rate adjustable rate mortgage than if they had been white. and african-american borrowers were 44% more likely to receive a higher rate on their fixed rate refinance loan than for a similarly-situated white borrower. latino borrowers were similar, receiving a higher fixed rate purchase loans, they were 60% greater than a similarly-situated white borrower. these data support what i found in my reporting about countrywide financial, one of the biggest subprime lenders

before it was acquired in a fire sale by bank of america in 2008. according to a former broker who spoke to me from the los angeles area where he worked for countrywide, it targeted low income borrowers with high cost loans. instead of receiving the best loan possible as countrywide's advertisements promised, borrowers were led to high-cost loans that resulted in rich commissions for countrywide's smooth talking salesmen. these loans also contained outsized fees to the company's affiliates, providing loan services such as appraisals and insurance. and also carried punitive prepayment penalties or interest rates that were set alluringly low at first only to skyrocket in a few years' time. countrywide financial's founder, angelo mozilo, talked

enthusiastically of wanting to help minorities and low income americans secure a mortgage. doing it part to democratize the home loan business, countrywide became the number one lender to both hispanics and african-americans. in a february 2003 speech here in washington, mozilo promised to devote $600 billion to mortgage loans for underserved communities through 2010. and yet according to company insiders, countrywide's systems were designed to increase costs for pres icily these -- precisely these types of borrowers. one former mortgage broker in los angeles said the countrywide branches in upscale neighborhoods had to slash their mortgage rates to be competitive with rival banks. but in areas that were predominantly minority, countrywide's rates were far

higher because company executives borrowers in these neighborhoods had few, if any, alternatives. the former employee told me, i'll put it this way; at countrywide's santa monica branch they lost anywhere from one to two percentage points on a loan. if they broke even, they were lucky. but in black areas the average points charged per loan was anywhere from two to four percentage points. and you were reprimanded if you did not charge more. countrywide's entire operation from its information technology to its incentive pay was designed to wring maximum profits out of the mortgage lending boom no matter what it cost borrowers. the company's computer system, for example, defaulted to a setting that automatically excluded a borrower's cash reserves from his or her financial statements. this had the effect of making the borrower appear to be less

financially sound, and he or she would be steered away from lower cost loans into those that were more expensive and more profitable. now, countrywide, of course, was not the only lender that appears to have targeted minority borrowers. a recent lawsuit against wells fargo over loans that it made in tennessee found that it foreclosure rates in black neighborhoods of memphis are almost 18%, five times the rate in predominantly white city neighborhoods and seven times the rate in predominantly white county neighborhoods. according to a sworn statement by a former wells fargo credit officer named mark taylor, mario taylor cited in this lawsuit, quote: the prevailing attitude was that african-american customers weren't savvy enough to know they were getting bad loan, so we would have a better chance of convincing them to apply for a high-cost loan. of course, high-cost loans make

it that much harder to build up equity in your home which has been the biggest source of wealth for many people over the years. and these punishing loans, obviously, increase the odds of foreclosure. a study by the atlanta constitution of foreclosures in that city found that african-american neighborhoods delineated by census tracts had foreclosure rates higher than minority white neighborhoods -- majority white neighborhoods. that's because the newspapers that african-american borrowers were more than twice as likely to obtain subprime loans than caucasians. it certainly gives a whole new meaning to the push for the american dream of home ownership. and yet z as we turn to the -- as we turn to the aftermath of the crisis, these are the very people who are also not getting any help from washington. while we throw billions of dollars at the lending

institutions that created this problem, main street is really left to fend for it. fend for it. unfortunately, this has created a view, it's a very pernicious view, that there are two types of rules. there are those for the rich, powerful, politically-connected institutions, and then there are the rules for the rest of us. and now i'd like to turn it over to josh for his, um, insights and interpretations and his views on how much fun it was to write a book together. [laughter] [applause] >> i think she was, she may not realize she wasn't kidding, it was actually delightful writing a book together. and i think it was largely because we both had been involved in this area, her from the writing side, me from the

wall street side for a very long period. and, frankly, we were early in warning about the crisis to come. and t probably worth taking a step back really into the early chapters of the book because the crisis, i don't think we've contextualized, i don't think anyone wants to have the honest dialogue that needs to be had in order to move past it and in order to start rethinking our public policy on housing. we talk about home ownership rates, but we don't ever define home ownership. and that really is the root of this crisis, is the problem of definition. we had this crisis began, frankly, as a result of the recession of the '80s. we came out of the recession of the '80s with home ownership rates in the early '90s stagnant, at levels they were at in the early '80s. we had home prices rising, and yet wages were flat. and so washington in its wisdom

recognized that there were two options, either figure out a way to increase wages sustainably or lower the standards to increase home ownership rates. and they chose the latter. and so we embarked upon the largest public/private partnership ever in the history of this country, and it had all of the parties in it. it had treasury, it had hud, it had fannie, it had freddie, it had the mortgage bankers, the realtors, the home builders, it had the community groups and the special interest groups. all of them were involved in this push to increase home ownership to intended record levels by the end of the millennium. and they created a platform that would carry that out. and that included reduced down payments, changes in building quality, innovation of new mortgage products and all of these were stated goals, and they were implemented as part of

policy, part of plan and part of the notion of wrapping ourselves in a culture of ownership. ownership society without ever having a discussion about what it was. and we forget that all of the benefits that historically have been conveyed by home ownership are real. there are greater ties to one's community. they are a better place to raise a family, more stable neighborhoods, typeically neighborhoods with more focus on educational attainment of the children in those neighborhoods. but we never stopped to ask what it was that really drove those as part of the social policy discussion. and history has shown that it's actually the down payment and the monthly payment of principal and interest in what has been a forced savings plan, a relatively illiquid investment

where money is paid in and trapped and very difficult to extract. and so the benefit of home ownership was one that resulted for most of the post-war period in people buying a home at about the time of family formation, making monthly payments of principal and interest such that at about the time of retirement they could have a mortgage purposing party, have the largest retirement asset and intergenerational wealth asset, and we've gutted that. and yet we brag about having achieved record levels of home ownership, which we didn't because there wasn't equity. it was phantom equity. and, in fact, the home ownership rates were created for consumption by politicians, by trade associations, by capturing congress and pressuring regulators to pay less and less anticipation to safety ask soundness -- attention to safety and soundness. and we watched as home ownership

rates climbed from their historic 62 to 64.5% which they've been at since world war ii to 1995 starting to ride to getting to 69.5% by the end of the millennium. and then we think about this crisis. and the reality is home ownership rated peaked in late 2003, early 2004. so where the's the crisis of 2004, 2005, 2006, 2007? and that's really the story. that's the story of the fact that we perverted all of our definitions. we watched the industry, fannie and freddie and later the mortgage bankers, the realtors, the home builders, the community groups, um, really push this notion that we needed to put more and more people into homes. but what we were doing by 2004 was giving people incentive to take the more and more risky mortgage products on homes that they already had as a way of

extracting the equity that they already had built up in their homes and create incentives for people to build and buy second homes and investment properties which is another piece that isn't really discussed here. so part of the crisis that we're living through right now is a crisis that was driven by the reality that in 2004, 2005, 2006 and the early part of 2007 between 36 and 39% of home sales were second homes and investment properties. okay? that's overhang that's not going to be touched by any of the current government initiatives to stabilize the housing market. that's part of the reason that the banks who we had put through these troubled asset relief programs still have these troubled assets on their bank balance sheets, okay? we don't want to really stop -- step back, look at what our housing policy did, what our financial service policy did,

and that really we've been seduced. we've been seduced by tax policies that incent leverage rather than the building of equity. and that leverage benefits not the consumer, but the lender. and that really is what this crisis was about. so each as we're start -- even as we're starting to talk about dodd-frank and its implementation and the rulemaking that goes with it and the building of more rational standards for housing policy we're still not willing to have the larger discussion about what rational housing policy should be, who it should benefit, how it should be implemented. does tax code have to be considered as something we need to address with it? if and instead we've got right back to where we were, this comingling of social policy with financial markets. and that's a very toxic brew. when you start handing the

opportunity for social policy goals and subsidies to be delivered through private market players, there's going to be money that doesn't meet its intended target. where historically the lending for first-time home buyers, buyers who had limited access, special buyers were sometimes delivered direct hi through government programs, and if you think back to the g.i. bill, right? and jenny may programs and fha programs the goal was to have the government recognize that there is some value in incenting home ownership. but in doing so directly, there's greater control, and there's less likelihood for seepage of profit-taking behavior. and fannie and freddie really were at the front end of comingling the social policy with financial market policy. and that, that really is the departure point that i think is

very important because in 2001 i wrote a paper called "house anything the new millennium, a home without equity is just a rental with debt." [laughter] and in that paper there was no, there really was no private label mortgage-backed securities market. i had been part of the creation of what we call subprime 1.0 in the '90s where we saw a large number of small subprime originators come, and really what they were doing was they were making loans that were still relatively traditional mortgage products -- 15-year, 30-year fixed products, traditional arm products -- to borrowers with blemished credit histories, and that industry, therefore, had a very small market that it could tap into. ultimately, that market went away because of prepayment rates accelerating after the russian debt crisis, accounting games

that were found to have occurred at that industry, and itdisappeared. and with that, wall street investment banks realized that if only they started innovating new product, they could expand that borrower class, and they could increase the home ownership and sell this dream to a larger number of people. fannie and freddie were a partner in that, and as much as fannie and freddie were at odds in many ways with the investment banks in the private market, they also had a partnership with them. and so what you saw was fannie and freddie by 2000 was innovating low down payment programs, was innovating the move from traditional underwriting where you would walk into a bank in your community, you'd look that banker in the face, he would look at your credit history, he would look at your employment hu ri, he would -- history, he would look and think about the regional economics in the

community in which you were borrowing and where your loan was, and he would make a loan decision. we could move to automated underwriting. we could move to automated appraisal processes. we could really change the structure and the dynamics of the housing and mortgage finance system. and they did. and we're here. and so even now as we're watching the discussion about, under dodd-frank there's a rule on risk retention where any securitizations the issuer and/or the originator are supposed to hold proportionally 5% of the structure. unless the loans that are in that pool are what's called qualified resident number mortgages. residential mortgages. and out i don't means the regulators with a proposed rule on what are qualified

residential mortgages, and you end up seeing the same group, the same partnership of the mortgage bankers, the banks, the community groups, okay? say hold on, if you were to make the qualified residential mortgage rule, there'd be minorities who would be kept out of home ownership or for whom the cost of home ownership would rise. haven't we learned that we're not helping people if we put them into products that are not sustainable? perhaps it's time that we think about really a functional housing policy that doesn't transfer the benefit to the banks or the issuers and instead to the borrower. so we've got a mortgage interest deduction as example which theoretically is supposed to benefit the buyer but really only benefits those who itemize their taxes, really only benefits the upper middle income and wealthy which we could turn on its head and turn into a principal equity tax credit which would, therefore, be

progress i, right? -- progressive, right? it would give people incentive to pay down every year as much principal as they can and build real wealth and real savings. we could create 529 accounts so that -- for mortgages so people can save for a down payment on a tax-free basis if we believe in housing policy as an important social tool for savings. but washington, in all of it wisdom, in all of the relationships that we talk about between the trade associations who own both sides of congress -- this is not a left/right issue, this really has become, unfortunately, a senate banking committee, house financial service committee, they both compete for the same dollars from the same trade groups, and the people in this room broadly as individuals have very little involvement in that process and very little to win in that process. and so our hope in writing this book was really to help educate

and illuminate what has gone on here so that, hopefully, there would be a little bit more public outcry for holistic policy, transparency in policy and understanding of who is funding the policy that comes out of our government intended to benefit us. and usually not benefiting us. so i think with that, that diatribe and rant -- [laughter] i would, i'd like to turn it back over. thank you. [applause] >> we're going to begin the question hour now. and so, please, come to the microphone with your questions or comments, and try and ask questions without many semicolons. [laughter]

so, please, begin. and if you're comfortable saying your name, please, do that. and gretchen morgenson and josh rosner answer the questions. i think you're going to have to get up. >> we can come up there. >> yeah. >> hi. i want to play devil's advocate to both of you. there are federal agencies in the federal government that regulate fannie and freddie. let's suppose, hypothetically, you were both invited to administer that agency. what would you do in your implementation? >> yeah, sure. first of all, the regulators that were charged with regulating fannie and freddie in the years leading up to the crisis when this was really, all this groundwork was being laid were really neutralized. fannie, especially its top executives, understood well how

to defang its regulator, how to co-opt congress, make congress really it regulator and so, therefore, they could buy congress, and they'd have everything under control. so for years this regulatory infrastructure over fannie and freddie was a 98-pound weakling, okay? and was punished, you know, whenever, you know, ofeo tried to talk about safety and soundness issues, it was, you know, drummed out of town. i mean, congress, they would get up on our legs and say we don't have a safety and soundness issue here. we need housing, you know? and so it was, it was not regulated well and aggressively because of the very proactive, you know, tactics of fannie mae and freddie mac. so i think looking back you can't really say that you had a good regulatory structure.

now, what we would do now, i mean, i think you have to have a somewhat adversarial relationship with these companies that you're overseeing. and when we interviewed barney frank for this book, we asked him, you know, why were you taking the side of the companies all these years when you could have been really helping the regulator do its job? and he said, i felt like there was becoming an adversarial relationship there. and we said, well, that's what it's supposed to be. [laughter] we're not supposed to be friends and colleagues here. they're supposed to be overseeing. so, you know, go ahead. >> no, no, no. i think if i were to summarize the book in a sentence -- that doesn't mean you don't have to read it -- [laughter] it really would be how fannie and freddie taught the financial service industry that if you capture congress, you've captured the regulator. and the industry learned that lesson. so with fannie and freddie as a

perfect example k you had -- you had the director of the regulator in 2002 write a white paper of the possible future systemic risks posed by fannie and freddie, and the white house asked for his resignation within 24 hours of that, okay? you had the regulator after an accounting scandal that it didn't do because, frankly, in my mind there was a captured examiner who was in charge, but in the aftermath of that accounting scandal the regulators started doing an investigation, and a senator called the hud inspector general to do an investigation of the regulator to try and stymy that, okay? so, frankly, there was this arms in the air finally by, i think, most of the financial regulators. and i'm not excusing the behavior, it's just the reality of they don't want us to regulate, what are we going to do? now, that was comingled with

this view of, hey, people do it in their self-interest, and none of these companies are going to intentionally drive themself off a cliff, so we'll just trust them to do the right thing. >> thank you. >> in the spring of 2008, i taught a undergraduate course in math and finance where we did present value analysis, duration of a bond which measures interest rate risk, formula for pricing options, capital and pricing models, value at risk and investment. thank god the course ended in may of 2008, before lehman brothers went bankrupt. [laughter] not a single principle of finance that i taught wasn't violated by the people who were running these major institutions. it was incredible. let me just make one comment here and then a question. the course announcement was

posted on the web site of gw in deof '07 -- december of '07. this was an undergraduate course. i was amazed. i got letters from three staffers at the federal reserve who wanted to take this undergraduate course. i couldn't believe it because there's no way they could get an mba degree. so, clearly, they knew something was brewing there. but looking at your look, i looked at references to goldman sachs, and here's my question. behind almost every shady deal that has been exposed, for example, they ripped off gadhafi, i was reading in "the wall street journal" just a -- [laughter] you know, a colleague of mine made a joke that if we could get the major investment banks in china and russia and japan, we could cut our defense budget by $500 billion a year. [laughter] because there's not a single economy in the world they

couldn't bring to it knees in five years. but my question with goldman sachs is this: given its deals like the abacus deal, where, why would anyone in his right mind take the opposite side of a trade with goldman sachs? i mean, according to classical free market economics, if a person is a shady banker or something, people stop doing business with them. and yet there they are bigger and better than ever. >> but, but that only, that only holds where there's a real free market. where there's an assumption that there is an informational or i should say an asymmetry of information between buyer and seller, you're always going to side with the one that you know has the asymmetry in their favor. and i think that really is a piece of what's gone on in the crisis which is there's an understanding that there are those who are always in the

know, always given advance information, have access at the levels of government where they know what the outcomes are before the questions have often even been publicly posed, and so you're right. in a closed system that was free market, you're right, you wouldn't take the other side. you, i'm sorry, in a free market you might take the other side because everyone can't be right all the time, but i think there's not a free market operating here. i think there's an assumption and a an understanding that it's not working fairly, so right now you're right. all i think you're saying is that this the corporation cronyism, and we have to address that. >> well, in your own book you mentioned that goldman sachs was responsible for managing the earnings of fannie mae -- >> absolutely. >> so, and they were involved in all sorts of these structured finance deals. >> well, you know -- >> and always benefited goldman sachs and no one else.

and so fine. but now why are they still in business? that's what i don't understand. [laughter] >> you know, it's also, i mean, i always feel a little uncomfortable with that question only because goldman sachs questions because, unfortunately, i think focusing so closely on goldman sachs actually helps us to forget that there are a number of other institutions that are equally culpable, that have gotten equally too big, too intertwined and too dangerous, frankly, for the public good, and we're not really addressing those. nor, by the way, are we even doing much digging into what goes on or what they've been involved in because this is a favorite whipping boy. >> thank you. >> but he's not defending goldman sachs. >> no, exactly. >> just so you know that. >> what effect, if any, did

repealing glass-steagall have on the crisis? [laughter] >> just a tiny little bit. [laughter] well, glass-steagall, of course, was the depression-era law that served i very well for 66 years, i think it was. um, of course, they were, you know, the big financial institutions were chipping away at it for years, finally succeeded with the help of robert reuben to annihilate it all together in 1999. and there's a picture in the book of the signing of graham-leech-buyly which was the repeal of glass-steagall, and everybody's smiling, and everybody's laughing, and greenspan's there clapping, and it's all a big love fest. and it really was the beginning of the end. um, if you look, there's a wonderful picture of, um, president roosevelt signing glass-steagall into law, and nobody is smiling. everybody looks very grim, and

it's the deep, dark depression. and putting those two pictures -- we don't have that one this book, but putting them together was such an interesting juxtaposition. it absolutely had everything to do with the crisis. um, it allowed the wall street firms to, um, vertically integrate, to expand their operations. it was part of this idea, again, that josh mentioned earlier that allowed them to take even more risks with the, you know, misguided notion that they would never risk the bank because they were too smart to do that. it also fed into this regulatory view that, um, regulation wasn't necessary. that regulation was a, um, you know, an evil, that bankers could be relied upon to do the right thing, could be relied upon to come up with their own capital ratios, to determine those kinds of things themselves. and so it was a real sea change,

i think. but it had been, you know, being degraded over a period of years, but it had everything to do with it and, unfortunately, it's very difficult to put the genie back into the bottle. >> yeah, no, i think gretchen's spot on. you know, it also created this opportunity, frankly, for the banks to compete with the gses when it came to the mortgage world, right? so fannie and freddie had certain benefits, including the fact that from a regulatory capital perspective their mortgage-backed securities had very low risk ratings. and we saw the basil committee of the view that the g sexs -- gses mortgage-backed securities should be a lower risk rating reversed at the behest of the banks and lobbying. and once they did and all of a sudden the notion was that all mortgage-backed securities with equal ratings should have the same risk rating, you ended up seeing the banks that had branches become very aggressive

in pushing mortgages through their own pipeline. but the investment banks had to figure out another angle. and that was vertically integrating, in many cases, their lending channels. the using third-party originations and then buying servicing and starting to build all of the information in advantage including the relationships which we haven't talked about with the insurers which were, again, part of the crisis, both the private mortgage insurers and the line insurers who were integral and central to the crisis and part of the goal of that financial supermarket that was intended with the repeal of glass steigel. >> thank you. this is such a rich topic, and no pun intended, but i don't even know where to start. but by saying, first of all, i really don't believe that this is so much a financial crisis we're in as a cultural crisis. and i think we're all culpable

because nobody has asked for any -- [inaudible] in this. you know, we're all so willing to go around and have wall street tell us, well, this is just a normal business cycle, and they're already preparing us for the next 15 years. it's going to happen again, folks. no question about it. what you've described is not capitalism. what you've described is economic tyranny. and, again, we are all, we are all victims of that, and i appreciate you for writing your book. i wish you would also look into some other, you know, topics about people who, um, have provided their money, the wealthy who have put a lot of their money in sweden. i wish you would write a book about deportation of these people. if they don't want to pay their taxes, let them live in sweden, but don't drive on my roads, don't use my libraries, don't use my public schools. just go where you want to go, where your money is going. thank you. [laughter] >> well, you don't read my e-mail because there's so many people looking for heads-on spikes in if my e-mail every

day. there really are a lot of people who are in that same, on your wavelength, absolutely. i mean, i think there is a sense -- and a colleague and i at the times have been writing articles about why there have been no prosecutions. and it's a very interesting question, um, why the dog didn't bark. very hard to come up with the authoritative answer. but one of the, i think, answers i did get that made sense to me that when you compare this crisis to the s&l crisis in which 800-some executives went to jail for a crisis that was far smaller in number in losses, in pain and agony that has been, you know, endured by people, where you had actual ceos going to jail, um, you know, we found that one of the key reasons that this occurred was because the regulators in the years when the, when things were good, in the years leading up to the mania and in the mania were not doing their job reining in the

practices, taking names, doing investigations so that when the bubble burst, they had no information to bring cases. and so, again, it's this regulatory capture not only had the initial problem of not reining -- of failing to rein in, you know, really perverse practices, it then had the secondary impact of contributing to this notion that it was nobody's fault, we can't bring a case, therefore, let's just all go quietly and forget that this ever happened. so i hear your pain, i feel your pain, you know, i think we are trying to get to the bottom of that, but it's a very complex issue. i also think it's a social question, i agree with you. >> yeah. and actually, you know, i agree, we both agree -- i think that was actually part of what drove us to agree to write the book together -- that this is a cultural issue. the heads on spikes, you know, would serve some value, but it

still doesn't address, to my mind, the more fundamental problem. and that's one that we're still leaving those people in power in charm of redefining -- in charge of redefining the system going forward and forgetting the fact, to my mind as a housing analyst, the largest impact of this crisis has not yet been felt. the largest impact of this crisis is going to be felt over the next 19 years as the largest generation in american history retires with less equity in what has historically been the single largest retirement in sewer generational -- intergenerational wealth asset. as we end up with a failure to fix the system to incent the pay down and the growth of, the pay down of debt and the growth of personal savings. and that becomes a real piece of this coming crisis because it's going to happen likely at the same time that our u.s. treasury

is forced to accept austerity and cuts in the social safety net. >> yes. lab rating on something you -- e labuating something you touched on, the department of justice continues to the present day, and i ask that as a formal federal prosecutor. >> i'm going to ask you. >> i don't know. i could write an indictment on these cases just on what i read in the newspapers in 30 minutes, and convicting these people would be like shooting fish in a barrel. >> it's the politicization, frankly, it is the politicization of the department of justice, the attorney general's offices, the lack of independence of the regional offices to bring cases. it is, you know, frankly, on the other side this political pressure that comes from a notion that we've, unfortunately, had to learn to live with. i don't agree that we have to, but we've had to. which is, gosh, if you do anything like that, you'll risk

destabilizing these very same institutions that we have spent so much effort trying to make look like they're solvent. >> this has never guided the fraud section of the department of justice in the past, and i want to know what's happened now. is the fix in? i mean, is that what you're suggesting? >> well, it's hard to draw any other conclusion, honestly. i don't know the answer, i am not the party to these e-mails going back and forth, you know? but it's difficult to draw any other conclusion that a debacle this large creating this much pain and this trillions in losses, that it was nobody's fault. and that there wasn't a crime committed. it's very difficult to -- that's, you have to suspend your disbelief for far too long to draw that conclusion. so, again, i think it is an an appetite to prosecute that suspect there. i think there is a fear -- that isn't there. i think there is a fear factor of losing the case. these are complex cases, these

are paper cases, you don't have a victim to point to, you know, who is dead on the ground. i mean, there are many, many excuses given. i buy none of them. i can only -- >> there's also been no real investigations. >> yeah. that's the problem, the regulatory infrastructure leading up to this had no investigation going on to really find the culprits, and then when you did get a case such as the one against angelo mozilo brought by the sec where it appeared to have extremely damning information, e-mails in which he is privately saying these loan are poison, toxic, these types of descriptions and at the same time publicly youing about how good his company is doing, financially sound and, you know, providing the best loan for all of their customers -- >> [inaudible] >> and selling stocks throughout, that seems to me to be a layup. but i am not a prosecutor, and i'm not a lawyer. so, unfortunately, i'm going to have to -- >> you could send him to the

slammer for life on the basis of that. and i cannot understand why that hasn't been done. >> i want to make sure that all those who are in line will get a chance to make their point, ask their question, so we're going to end with the last woman in line. >> no point, just a question or two. my glass-steagall question got asked, so i'm left with what do you think of dodd-frank, the response to this crisis? and any heros? >> um, dodd-frank, in my view, really missed, whiffed the big one which is too big to fail. did nothing about cutting down these institutions to a manageable size, to a size that does not imperil the taxpayer. um, that is the key failing in dodd-frank. another failing, i think, is that it has left hundreds of rules to be made by regulators, and so, therefore, providing a

second, um, manipulation possibility for the industry. so they got their first chance when they were talking about the legislation, writing the legislation, they got their first chance to manipulate. now they can manipulate the regulators, two bites of the apple. >> is it any better than nothing? >> i think there are parts of it that are fine, that are good, but i think a 3,000-page law, okay? glass-steagall was 32 pages. [laughter] 3,000 pages is, you know, it's way overdone and not, um, not effective on the crucial issue of too big to fail. >> yeah. and not to take much longer on that, i think i agree with gretchen. you know, why couldn't you have just added one paragraph that, essentially, said any institution that has to rely on extraordinary government asset p purchases, debt guarantees or more than 60 days at the window will have its senior management and officers removed at the

earliest convenience of the board and barred from employment as consultant or otherwise at a regular layed -- regulated entity for a period of fife years. -- five years. they would spend money on increasing risk management to the point where they were ameliorating those concerns, okay? we didn't want to do that. there's a reason for that. and legislators did a great job of doing everything but legislating because they did, as gretchen said, left everything to the regulators to define. >> and you had asked about heros. >> and heros. >> we had some heros. there were some folks at the cbo, the congressional budget office. we have a wonderful vignette where they came up against fannie mae when they were in 1995 part of the congressional, part of the congress act in '92 which was the safety and soundness act that created a new regulator of fannie and freddie, asked for studies from treasury, gao, hud and cbo. cbo did a masterful job of analyzing how rich the subsidy

was from the government that fannie mae received. they were visited by fannie mae executives, june o'neill who was the head of cbo at the time said she felt like they were being visited by the mafia. [laughter] they were, she was pressured to try to water it down, not to produce this report that was very explicit about how much the government guarantee was worth to the company and how at all costs they had to protect it. so we have cbo people who were, you know, standing up against the pressure from fannie mae. there are other people who saw what was coming, people in the, in the georgia area who were first to wave the flag and call out the rating agencies for inserting themselves in a process where georgia had the most toughest predator lending law this country, but the

ratings agencies walked in and said we will not rate any securities that contain georgia loans. and so all of that predatory lending law had to be gutted because the rating agencies said they would not rate those loans. so we had people along the way who were jumping up and down and warning, so there are some heros in the book, i'm glad to say. >> thank you. >> you make a very strong case for the central role of housing policy and the behavior of the gses as factors in the build-up to the crisis, but i have never been able to understand how a housing policy leads private investment banks to go bankrupt. it seems to me that when bear and lehman went bankrupt, that it seemed like there was a lot of mere incompetence or possibly malfeasance in the behavior of those institutions and many

others that contributed to the failure of those institutions. i see no obvious causal connection from the housing policies to mistakes in investment banks. i wondered what your theory of those mistakes is. >> well, certainly, bear stearnss was a huge player in the mortgage market, and the fact that the leverage that these firms were allowed to take on which was something that henry paulson, um, inpor tuned the sec to allow, it was to increase the leverage that these firms could take on their books. and that really led them down the path to per decision because only a small loss really was magnified bety leverage they had. there was a tremendous amount of profitability and risk taking related to mortgages on wall street. um, look at cupwide, look at bank -- countrywide, look at bank of america. it's in trouble now because of its lending practices. >> yeah. i mean, you also have to remember that the mortgage-backed security, well, the residential mortgage was the

lowest-risk asset. from a capital perspective. okay? >> and that's a big party of why the banks went head first into this, why they leveraged it, why you took mortgage-backed securities, and then when you didn't have natural buyers for them, you took the tranches and bundled them into collateralized debt obligations and then multiplied that further and further. and if you look back in the e-mail files even of the financial crisis inquiry commission, one of the things that you find is that there were other institutions that would have gone down because they retained risk which is one of my biggest problems with dodd-frank is you've got this risk retention rule which essentially says we should have these institutions retain risk on the notion that, certainly, if they have to drink the poison, they're not going to feed it to others. the reality is these institutions often didn't realize that what they were serving up was poison. and so what you saw was in 2007

you saw an e-mail -- in e-mail files institutions, bear was ignoring it, merrill, stan o'neal didn't even realize the size of the exposures he had until he was in hot water where goldman and many others who still had problems were quickly trying to offload what they had as remaining risk as quickly as they could. so those instruments, the murkiness, the leverage, the nontransparency, the inability of regulators to even look into a cdo because they weren't qualified institutional buyiers with the right to are very central to the crisis. >> well, i think you've explained why there were severe temptations presented to those corporate executives, but you haven't explained why they yielded to those temptations. after all, they played to make money, and they lost money. so -- >> a lot of banks made a lot of money on their stocks -- >> you made money until you didn't. >> well, that line of argument, i think, is another kind of

missing line of argument. the question is, alan greenspan famously commented on this, can you trust the executives of these institutions to have the interests of the institutions as such at heart? because it would appear in these episodes that the interests of the institutions might have been sacrificed to those of the executives. and i think, again, going back to the question of the heads-on pikes, i think that phenomenon also deserves a lot of attention. >> agreed. >> hi. looking forward and thinking about the next election, um, and i'm assuming the answer to this question is no, but what do you think is the possibility of there being some kind of discussion of housing policy going forward in the next election? it would seem like the obama plan and, i guess, the plans

that the republican are talking about are different. >> none of them are housing policy. >> none of them are housing policy. >> well, yeah. no one is talking about housing policy. housing policy is actually a broader discussion about what we need to do by way of housing our population. renting versus owning, do we need mobility because we've got a changing social reality and demographics? do we need to change the tax incentive structures to meet whatever we decide as social policy goals or housing policy goals? do we want to have the social policy transmitted through private corporations who will deliver subsidies or on the government's balance sheet? that's a housing policy discussion. we're not having that. really what we're having is a very narrow discussion which is a political discussion still about do we put a stake through the hearts of fannie and freddie, and what do we replace them with? that's not a housing policy question. so do i have any expectation that either of those discussions, the one we're

heading down or a real substantive discussion on housing policy is going to be part of the election? probably not, so you're right. um, but even in terms of what do we do with the gses, there's an, i think, understanding on both sides that we want to kick that one down the road until after the next presidential election. >> don't forget that we're also in still in the depths of the housing crisis because foreclosures are still massive. people are massively underwater on their loans. so there's a sense that we can't deal with this right now. >> although that's an opportunity -- >> yeah, exactly. >> that's an opportunity both to use as a catalyst for real housing policy and, also, for the solution to the ongoing crisis to define what the housing policy can transmit, or can change into and transform into. >> um, speaking of the ongoing crisis, i wanted to ask, um, about the programs, um, to help

borrowers who are in trouble. and my reason for this is personal knowledge and experience with two mortgages. one is the mortgage my husband and i hold on our house in washington which is in a neighborhood where house prices have risen, um, we have plenty of equity, we are clearly not the sort of people who need to be helped by the government. nonetheless, last year our loan servicer called us up one day -- >> wow. >> and said because your mortgage is held by freddie mac, you qualify for this program. and within a week we had a no appraisal, no cost, no documentation of income refinance at, um, refinance at a lower rate. it was wonderful. i mean, the the best refinance i've ever done. >> you must know somebody in high places. >> no, no. [laughter] anyway, the other mortgage,

though s that of my -- is that of my contractor who is hispanic, lives in alexandria, is underwater. has an arm which was originated by countrywide and, um, now is serviced at least by bank of america. they're not, they do not expect to default, but he wants to refinance this and a second mortgage to get a fixed rate mortgage before rates go up. they have been trying for a year now to get the paperwork for the hud program through their, um, through bank of america, and they have gotten the run around over and over and over. and then last week somebody said, oh, everything is fine. you really are going to get this. and let's have you talk to mr. sanchez. and mr. sanchez told him everything was going to be fine. as my contractor said, they were going to move heaven and earth.

only the next day when mr. sanchez sent documents and talked him into signing the documents, it turned out that mr. sanchez was -- is a sleazy lawyer who was getting them into a contract to spend something like $2500 to negotiate the mortgage that they've been -- the refinance they've been trying to do with no guarantee of success. um, fortunately, they were savvy enough and -- >> thank goodness. >> also my contractor talked to me, and i'm a lawyer, and i said you cancel now! but it seems to me that my feeling is that maybe freddie mac is trying to raise its figures and look like it really is helping lots of people who need help by putting through mortgages, by refinancing mortgages like ours. and in the meantime, people like my contractor who really should be being helped by the