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 lopes. ..

>> said jazz borrower kravis gore's to ensure results were not based on differences of the risk factor. we move to the apex of the boom the center made another study of 177,000 in 2006 said it is included the odds

of receiving a higher fixed-rate purchase loan were 71 percent greater for the african americans then the whites. african-americans in the sample were 15% more likely to receive a higher rate adjustable-rate mortgage then if they were at white and 44% were likely to receive a higher rate on the refinance loan latino borrowers were similar receiving the six rate purchase loans 60% loans than those of a wider bar were. these data support what i have found about countrywide financial all one of the biggest some private lenders in the fire sale of bank of america in 2008. according to a former broker who spoke to me that lourdes

for countrywide targeted to low-income borrowers with high-cost loans. borrowers lourdes led to those loans that have rich commissions tata force with talking salesman for those providing loan services such as appraisal or insurance and carrying punitive prepayment penalties are interest-rate set low of first only to skyrocket in a few years' time. countrywide financial founder angelo mozillo talked enthusiastically of wanting to help minorities and low-income americans secure a mortgage in doing

its part to democratize the home loan business, a country brought days countrywide became the number one vendor to african-americans and hispanics. february 2003 speech here in washington he promised to devote $600,000,000,000.2 mortgage loans for the underserved communities for your 2010. and according to company insiders the systems were designed to increase cost for precisely these types of

the santa monica branch they lost anywhere between one per two percentage points on a loan. if they broke even they were lucky but the average points charged per loan were 12 percentage points a new reprimanded if you did not charge more. countrywide entire operation from the incentive pay was designed to bring maximum profits out of the mortgage lending boom. no matter what the cost borrowers. the computer systems defaulted to a setting that automatically excluded a borrower's cash reserves from his or her financial statements appearing to make the bar were to be less financially sound and steered away from lower cost loans into those that were more expensive and

profitable. 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 shows the foreclosure rates were almost 18% or five times the rate of predominantly white city neighborhoods and five times those of county neighborhoods. according to a statement from of credit officer officer, mario taylor cited in a lawsuit, the prevailing attitude was african-american customers were not savvy enough to know they were getting bad loans we had a better chance to convince them to apply for the high costs 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 increase the odds of foreclosure and a study by the atlanta constitution found african-american neighborhoods have foreclosure rates higher the majority white neighborhoods. that is because african-american borrowers were more than twice as likely than those of caucasians. it gives a whole new meaning to the push for the american dream of home ownership. and as three turn to the aftermath of a crisis these of the very people who are also not getting any help from washington. its ticket from the lending institutions that created the problem main street is left to fend for itself.

this is a pernicious you those rich powerfully connected and then the rules for the rest of us know i'd like to turn it over to josh for his insights and interpretations and his views on how much fun it was. [laughter] [applause] >> >> it was delightful writing a book. we were both involved in this area of the wall street side for a loan period and frankly we were in mourning of the crisis to come.

and taking a setback to the early chapters of the book because nobody wants to have honest dialogue in order to start rethinking your policy on housing. talk about homeownership rates that to define that that, that is the root of the crisis is the public definition that we've had this crisis began as a recession of the '80s. it was stagnant at waffles up their act and home prices raising the yet wages were flabby at washington recognize there were two options to three jetaway to increase wages are lowered

the standards to increase homeownership rates. and they chose the latter so we embarked upon the largest public-private partnership ever in the history of this country and did have all the parties treasury, hud, fannie and freddie a mortgage bankers, realtors, home builders, the special interest groups all of them were involved in the push to increase homeownership to the intended record levels by the end of the millennium. into the platform to carry that out that included reducing downpayments in changes of building quality and innovation of new mortgage products and all of the user's stated goals and implemented as part of policy and plan and wrapping ourselves in a culture of

ownership of what it was a and all of the benefits that have been conveyed by home ownership were real and they are a better place to raise a family more stable neighborhoods with more focus on educational attainment of the children and we never stop to ask what it was that was part of the social policy of discussion and history has shown that it is actually the down payment and the monthly payment of what is a forced savings plan where money is paid been and trapped and very difficult to extract so it was most of

the postwar period to people by the home to make monthly payments of principal and interest such that at the time of retirement they could have the mortgage burning party and yet to we achieve record levels of home ownership which we didn't because there wasn't equity. it was phantom equity and homeownership rates were created for consumption by politicians, trade associations, by capturing congress and pressuring regulators to pay less and less attention to safety and soundness and we watch as homeownership rates climb from their historic 62/64%

or they have been since world war ii racing to 9% by the end of the millennium then we think of the crisis and reality is homeownership rates peaked late 2003 s least 2004. where is the crisis then up through 2007? that is a story the fact that we perverted all definitions and watched the industry of fannie and freddie and the mortgage bankers, realtors and homebuilders in the community groups really push the notion we should put more people into homes but what we were doing by 2004 was giving people incentives to take the more risky mortgage products on homes that they already had as a way of extracting the equity they had built up and create incentives for people to buy

second homes which is another piece that is not discussed sell part of the crisis we lived through is what was driven by the reality that 2004 through 2007 between 36 and 39% of home sales were second homes and investment properties. that is overhang that will not be touched by any current issues to stabilize the housing market part of the reason the banks to be put through the troubled assets relief programs still have a troubled assets on the bank balance sheets. we don't want to step back and look at what the housing policy did and the financial service policy did and really we have been seduced by tax policy is rather than

the building of the equity and debt leverage benefits not the consumer but the lender and that is what this crisis was about. so even as we start to talk about dodd/frank and the implementation of the rule-making that goes with it and the building of more rational standards for housing policy come mobile not willing to have a larger discussion of what it should be and how it should be implemented does the tax code have to be considered as something to be with fat and then right back to where we were the call mangling of social policy of the financial markets when you start handing the opportunity for social policies and goals and subsidies to be delivered through private market players, there will be money

that does not meet the intended target. where historic leave the lending for the first-time home buyers those that have limited access were delivered directly through government programs if you think back to the gi bill and judy me and fha, the goal was to have the governor recognize there is some value to incentive of home ownership but doing so directly there is greater control and less likelihood for seepage of profit-taking behavior and fannie and freddie for the front end of cool mingling of social policy with the financial market policy. that is the departure point* that is important because in 20001 reem road to paper it

is just a rental with debts. [laughter] and in that paper there really was no private label mortgage-backed securities market and i had been a part of the creation of what we called subprime one point* o in the '90s where we saw a large number of subprime originators come and make loans that were still 30-year fixed-rate products traditional farm products to borrowers with blemished credit history and that industry had a small market it could tap into. alternately that market went away because the prepayment rates after the russian debt crisis and the accounting games found to have occurred with the industry and it disappeared.

with that, wall street investment banks realize if only they started to innovate new products they could expand the borrower class and increase some ownership and so the dream to a larger number of people. fannie and freddie were a partner in psat and as much as they were at odds with the investment banks of the private market, they have a partnership with them. fannie and freddie by 2000 was innovating low down payment programs and the move from traditional underwriting where they walk into a bank and that it banker will look to your credit history, employment history, think about the regional economics of the community and where your job was and make a loan decision and fannie and freddie realize four efficiency and instant gratification we

could move to automated underwriting and automated appraisal process. change the structure and dynamics of the housing and mortgage finance system. they did. and we are here. even now as we watch the discussion about a endure dodd/frank there is a rule under risk retention where the originator is supposed to hold proportionately 5% of the structure of less those that are called qualified residence and out comes the proposed rule and you end up seeing the same partnership the same unholy a lot -- alliance to the mortgage bankers and in the community groups say hold

on. fewer to make this there is minorities that would be kept out of home ownership or for the cost of it would rise. are we not helping people putting them into products if they are not sustainable? perhaps if you think of the functional policy that doesn't transfer the benefit to the banks are to the issuers or to the borrowers? the mortgage interest deduction that theoretically should benefit those that itemize taxes and benefits the upper middle and come which we could turn on its head into a principal equity tax credit which would be progressive to give people to pay down as much principal as they can to

build wealth and savings and create the 529 accounts so people can say for the down payment with the tax rebate as the important social tool for savings but washington and all of its wisdom and relationships that we talk about between the trade associations and both sides of congress common this has become unfortunately a senate banking committee naboth compete for the same dollars and the people in the room have very little involvement in the process so the hope of writing the book was really just to help educate and eliminate what has gone on so there would be more public outcry for

the holistic policy and transparency the understanding of who was funding the policy that comes out of the government intended to benefit us and not benefit us. so with that diatribe and grand. [laughter] i would like to turn their back over. thank you. [applause] >> we will begin the questioning our now so please come to the microphone with your questions or comments and tried to ask questions without too many semicolons. [laughter] soties began and if you're comfortable saying your name, please do that.

and gretchen morgenson and joshua rosner will answer your questions. >> i want to play devil's advocate. there are agencies that regulate fannie and freddie was suppose hypothetically you could minister the agency what would you do with the implementation? >> the regulators that were charged the years leading up to the crisis were neutralized they understood how to coopt congress says they could by congress and

have everything under control but this regulatory structure was a 98-pound weakling and was punished whenever ofheo tried to talk about safety and soundness soundness, it was drummed out of town they would say we don't have safety and soundness issue. we need housing. it was not regulated well because of the very proactive tactics of fannie mae and freddie mac so looking back you cannot say we have a good regulatory structure. i think you have to have an adversarial relationship and

when we interviewed barney frank for the book, we ask him why are you taking the side of the company all these years when you could have been helping the regulator do its job? he said i felt there becoming an adversarial relationship and said that is what it is supposed to be. we're not supposed to be friends and colleagues, they are supposed to oversee. >> if i were to summarize the book in one sentence, that does not mean you don't have to read it but that means what has captured congress to capture the regulator and the industry learns that less than. with fannie and freddie as a perfect example you have the director of the regulator rate a paper and a possible

future systemic risk and the white house asked for his resignation within 24 hours. you have the regulator after the accounting scandal the tests there was a captured examiner in charge but in the aftermath of that accounting scandal the regulator started to do the investigation and called the hud inspector general of the regulator to stymie that. so there was this arms in the air and i am not excusing the behavior but it is just the reality they don't want us to regulate, what will we do? that was the view of people do it in their self-interest and nobody will intentionally drive themselves off a cliff so we

will just they do the right thing. in the spring 2008 to and a course of math and finance where we did present value analysis and interest rates risk and pray saying options and models and how you measure the risk, if they got the course ended me 2008 before lehman brothers went bankrupt. not to a single order were of those who ran the major institutions. the course announcement posted on the website in december 2007.

i was amazed. i got letters tata from staffers that the federal reserve who wanted to take a course i could not believe it. so clearly they knew something was brewing but looking at the book looking at the references to goldman sachs behind every shady deal that has been exposed ripping off gaddafi from the "wall street journal" somebody made a joke if we could get the major investment banks in china and russia and japan by $500 million per year there is not a single akon read they cannot bring to their knees but my question is

just like the a but this deal why would anyone in his right mind take the opposite side of a trade with goldman sachs? according to economics, if a person is a shady banker there they are bigger and better than ever. >> but that only holds where there is a real free market where there's the assumption of the asymmetry of reformation between buyer and seller and that is a piece of what is going on in the crisis there is an understanding those who are always in the know given advance information the levels of government new-line before they have

been pros stance go in a closed system that is free market, you were right. you would not take the other side. i am sorry. in a free market you might but there is not a free market operating but the assumption of understanding fact it is not working fairly. right now you are right two i think you are saying this is corporate cronyism and there hasn't been anything to address that. >> with those who are responsible for managing the earnings with the structured finance deal but goldman sachs than no one else but that is what i don't understand. [laughter] >> i feel uncomfortable with

that question only because goldman sachs question and fortunately i think focusing so closely on goldman sachs there are a number of institutions that are equally culpable that are to intertwined and dangers for the public good and we're not addressing those nor are we doing as much digging into what goes on our has gone on because of that. >> he is not defending goldman sachs. >> what effect if any good as glass-steagall have on the crisis? >> just a tiny little bit. [laughter] >> of course, that was the

depression-era law that service very well 66 years and of course, they were chipping away added four years and finally succeeded with the help of robert rubin to annihilate altogether and 1999. and there is a pitcher in the book of the signing of the repeal of glass-steagall everybody is smiling and laughing and greenspan is clapping and it is a love fest. it really was the beginning of the end. there is a wonderful picture of president roosevelt signing glass-steagall into lot and nobody is smiling and everybody looks very paid gramm and it is the depression and we don't have that but putting them together is such the

interesting juxtaposition absolutely have everything to do with the crisis. and allowed the wall street firms to vertically integrate, expand their operations him part of the idea that was mentioned earlier that allows them to take minimal risk and the misguided notion they would never miss the bank because they were too smart to do that and also fed into the regulatory view that regulation was not necessary and was then able that baker's could be relied upon to come up with their own capital of ratios and and to be degraded over a period of years and unfortunately it is very difficult to let the

genie back into the bottle. >> rich in is bought on and it created the opportunity to compete with fed gse self fannie and freddie had certain benefits including the fact from the regulatory capital prospective we saw the basel committee, led gse that dazed at the behest of the bank's and once they did the notion was all mortgage-backed securities should have the same risk weighting you view and obscene the banks that have branches become very aggressive to push mortgages through the own pipeline but the investment banks have to figure out another angle that was vertically

integrated the lending channels and originations end starting to build the information including the relationships which we have not talked about which is part of the crisis those that are interval to the crisis and part of the goal of that supermarket that was intended -- . >> this is such a rich cojones topic i don't know where to start but i know believe it is a financial crisis as it is a cultural crisis. we're all culpable nobody has asked for any had found breaks. we're willing to have all

street and they're already prepared over the next 15 years. and then what you describe his economic tyranny. we're all victims of that. also looking into other topics i wish you would write to a book about the deportation. do not drive on my rhodes or use my libraries just go we want to go. >> you don't read my e-mail so many people are looking for people every day. there are a lot of people better on your wavelength absolutely.

writing articles live there has been no prosecution and it is an interesting question to come up with the authoritative answer when you compare this crisis to the s&l crisis or 800 executives go to jail for a crisis that is far smaller in number the of losses and pain and agony endured by people with actual ceos going to jail, one of the key reason since this occurred was because the regulators when things lourdes could they were not doing their job training in the practices and taking names in doing investigation so when the bubble burst no

information to bring cases who the regulatory capture not only had the initial problem of failing to rein in perverse practices and you cannot bring back case and forget this ever happened. but it is a very complex issue rows of think it is a social question. >> also part of what joe was that this is a cultural issue. this spykes would serve some value but it still does not address to my mind the more fundamental problem and that

is one that leading those people of those going forward in my mind the largest impact has not been dealt. largest impact is felt over the next 19 years is the largest generation in american history retires with less equity historic clave said wealth transfer assets as we have a senior homelessness as a result and end up with the failure to fix the system and paid down and that is a part of the coming crisis of because treasury is forced to accept austerity and cuts in the safety net.

>> what do attribute theater passivity of the department of justice which continues? >> i will last do. >> to us from what i read and 30 minutes, it is like shooting fish in a barrel. >> it is the political -- politicalization of department of justice, attorney general's office and lack of independence and frankly on the other side this political pressure that we had to learn that we had to if you do anything like that you'll risk destabilizing the same institutions that we have spent so much effort trying to look like they are

solvent. >> i want to know what has happened. is that what you are suggesting? >> it is hard to draw any other conclusion honestly. i am not a party to the e-mails going back and forth but it is difficult to draw conclusions to a debacle this large creating this much pain and chile and sen losses that it was nobody's fault and a crime was not committed. it is very difficult you have to suspend your disbelief to draw that conclusion. it is an appetite to prosecute and a fear factor of losing the case. they say they are complex cases, you don't have a victim who was dead on the ground. there are many excuses.

>> note investigations. that is a problem the regulatory infrastructure has no investigation and going on and win a did give a case to have extremely damning information and emails where they say they are poisoned and toxic these kinds of descriptions him publicly crowing about how good his company is doing for a chili's down to provide the best loans and selling stocks. that seems to be away at but i am not a prosecutor or lawyers who i can. >> you can be sent to the slammer for life but i cannot understand why that has not been done. >> we

want to be sure those that are in line can make their point*. we will end with the last woman in line. >> my glass-steagall question was asked. what do you think of dodd/frank response to the crisis and any he rose? >> dodd/frank missed the big one of two big to fail and did nothing about cutting down the institutions to a manageable size that does not imperil the taxpayer. that is the key failing of dodd/frank. another is it has left hundreds of rules to be made regulator so therefore providing a second to manipulation possibility for the industry so they got the first chance talking it out

the legislation the first chance to manipulate now they can manipulate the regulators the. >> parts of men are fine and good but the 3,000 page blog glass-steagall was 32 pages. it is way overdone and not effective on the crucial issue of too big to fail. >> not to take much longer, i agree why couldn't you have added one paragraph that said any institution that has extraordinary government asset purchases more than 60 days have the senior management removed at the earliest convenience and barred from employment for a period of five years? if you did that these companies would choose

shrink themselves to the point* where they could manage their risks or spend money on increasing their risk management to where they would ameliorate those concerns. we did not want to do that. legislators to a great job of doing everything but legislating because they left everything to the regulators. we have some heroes. the cbo, we have a wonderful been and they came up against fannie mae 1995 as part of the congressional private congress act to create a new regulator lourdes tertiary gao and had and the cbo that did a masterful job to analyze how rich the subsidy was from the government that fannie mae received. they were visited by fannie mae executives in june neil

who was the head of the cpr the time that said they felt they were being visited by the mafia. she was pressured to try to water it down not how much the death my guarantee was worth and how it cost we have the cbo people standing up against the pressure from fannie mae and others who saw what was coming and people in the georgia area was the first wave the flag to call out the rating agencies for asserting themselves in a process where georgia has the toughest predatory lending law in the country that's they said we will not raise any security that contains the georgia loans. that predatory lending law

had to be gutted because the rating agencies said they would not rate of those loans. people were warning along the way so there are some he rose in the book. >> you make a strong case for housing policy and the gse's as factors in the crisis but i haven't been able to understand how housing policy leads a private investment banks to go bankrupt. it seems to me that bear stearns and a member others went bankrupt, it seems like there was a lot of mayor incompetence or malfeasance with the behavior of those institutions and others that contributed to the failure of those institutions and no obvious connection from

those policies to the investment banks and what is your theory? >> bear stearns was a huge player in the mortgage market and the fact the leverage they were allowed to take on which was something henry paulson importuned the sec to allow to increase the leverage that they could take on that led them down the path because only a small loss was 95 by the leverage. there was a tremendous amount of profitability and risk-taking related to mortgages on wall street. look at countrywide, bank of america and it is in trouble because of the lending practices. >> remember, the mortgage-backed security, the residential mortgage was the lowest risk asset from a capital perspective. that is a big piece why the

banks went headfirst into this and what you took mortgage-backed securities and when you didn't have natural buyers for them, you bundled them into more leveraged instruments than multiplied that further and further. if you look back into the financial crisis inquiry commission, one of the things that you find is there were other institutions that would have gone down because they retained risk which is my problem with dodd/frank that says we should have these institutions retained rest certainly if they have to drink the poison they will not feed it to others but the reality is they didn't realize what they were serving was poison. so what you saw in 2007, the email fios, institutions ignoring, and stan o'neal

did realize the exposures he had we're goldman and joy java still have problems quickly trying to offload as quickly as they could. those instruments the leverage and non transparency to even look because they were not qualified institutional buyers, are very central to the crisis. >> but to explain why there was the temptations are you have not explained they played to make money but they lost money. >> they made money on the stocks. >> but that line of argument is missing but the question is can you trust the

executives of these institutions to have the interest of institutions? because it appears the interest of the institutions may have ben sacrifice to with the executives i think that phenomenon deserves a lot of attention. >> we agree >> looking forward thinking of the next election i am assuming the answer is no but what is the possibility of their being a discussion of housing policy going forward? it seems that the obama plan what they're talking about is, gse there is seeing

understanding on both sides we want to kick that down the road until the next presidential elections been a clear still in the depths of the housing crisis because foreclosures are so massive that there is a sense we cannot deal with this right now. >> although that is an opportunity as a catalyst or as a real policy also as a solution to define what the housing policy can change your transformed into a. >> i went to talk about the programs that personal knowledge and experience

that one is a mortgage we hold on our house in washington is in a neighborhood where house prices have risen, we have equity and are clearly not the sort of people that need to be helped by the government but last year our loan servicer called us up to say because your mortgage is held by freddie mac you qualify for this program. within one week we had no appraisal, at no cost, no documentation of it come refinance at a lower rate. it was wonderful it was the best i have never done. >> you must know somebody. >> no. but the other mortgage is of my contractor who lives in alexandria and is under

water and has the arm originated by country ride is now serviced by bank of america. they do not expect to default that wants to refinance to get the fixed-rate mortgage. they have been trying over a year to get the paperwork for the hud program through bank of america and get the runaround. then last week somebody said you look at this and talk to mr. sanchez to told them everything would be fine and they would move heaven and earth only the next day when he asked for documents and talked into signing the documents it turns out he is

a sleazy lawyer who was putting them into a contract of $2,500 to negotiate the mortgage they were trying to refinance with no guarantee of success. fortunately they were savvy enough. of/. i said you cancel. now. but it seems to me that freddie mac is trying to raise the figures, it by putting through mortgages like ours but in the meantime people like my contractor who really should be getting helped are not getting the hope that they need. >> there was a the treasury to program-- treasure program has been a unmitigated disaster from

the house said it was badly conceived and almost the worst possible combination of people coming up with an idea of how to not help people is how it ended up working. bank of america, and again they lose the paper work and don't allow of the modifications and there just doesn't seem to be a real defense either in the private or public sector to make their rational and intelligent decision about who should be helped and who should not be held so i think the government has done a woeful job and can to retain to the idea that main street got it in the neck and everybody else walked away with a lot of money. >> also my contractor was a failure of regulation

because it is clear that someone at bank of america was in collusion with the sleazy lawyer which that seems to me to be really egregious. >> unfortunately again, we don't have a housing policy and not making excuses for one or the other, i don't know the basis in the background for your equity and home but the other side is freddie mac subsidizing, not necessarily in your case some thought were not able? to get those into a house where they have not done the appraisal or and, verification but that is a big difference on top of that between the two comparing apples to oranges. fannie and freddie our government guarantees owning their credit risk.

bank of america, the likelihood is the contractors mortgages not even held by bank of america but those investors have to be considered. the problem is bank of america is a servicer that owns the largest portfolio of second means of home-equity lines so there is risk to them on that. you are right it is a problematic situation and government isn't interested in but before you can have bank of america eritrea borrowers well, they need to be conflicted in the relationship between the second liens they hold and the first that they serve. . .