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engage customers. that's fantastic and wonderful to meet david and to see in person this incredible institution that everyone loves so much in washington. now, josh and i have been a little bit on the book tour. the book came out may 24th, and among the questions that we always get or often get from interviewers, buyers of the book, e-mail in mying the at the time -- my e-mail account at the times, what surprised you the most about the investigation you both did to come out with the book? we all know there's a lot of books about the financial crisis, many recounting the events during the crisis and the heat of the panic of 2008. some of them go back a little bit further in time to describe some of the ground work that was laid to create the crisis, but

josh and i decided to go back much further into the early 1990s to really tell the tale because a debacle this large really didn't happen overnight, and unlike some of the book's conclusions, other books' conclusions that it was nobody's fault, sort of a series of events that could not be helped, we really believed 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 continued to this day to be in positions of power or are even in positions of greater power

than they were. a second paradox that trillions of dollars of losses being indured by -- endured by investors and borrows and yet no one in the mess being held accountable, but for me the most complexing 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 this push tromped 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 -- 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 disportioned number of loans with pre-payment penalties. the center found borrowers in zip code areas of minority groups, the odds of receiving penalties for 35% higher than those of similarly situateed

borrowers where minorities were less than 10% of residents. it was for key borrowers and key characteristics like credit scores to ensure results were not, we pete, not -- repeat, not, based in differences on risk factors. the center made another study of 177,000 loans in 2006, and it concluded that the odds of a higher rate were 71% greater for african-americans than for whites. african-americans in the samp received 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. la -- latinos were similar. they were 60% greater than a similarly situated white boar borrowers. this data supports what i found in my reporting about country wide financial, one of the biggest subprime lenders before acquired in a fire sale by bank of america in 2008. according to the los angeles area, it targeted low income borrowers with high cost loans. instead of receiving the best loan possible as country wide's advertisements promised, borrowers were led to high cost loans that resulted in rich commissions for country wide's smooth talking salesman. these loans also contained outside fees to the company's

affiliates providing loan services like appraisals and insurance and also carried punitive pre-payment penalties or interest rates set alluring low at first only to skyrocket in a few years time. they talked of wanting to help minorities and low income americans secure a mortgage doing its part to democktize the home loan business, country wide was the number one lender to hispanics and african-americans. in a speech, they promised to devote $6 billion to underserved communities through 2010. according to company insiders, country wide systems were designed to increase costs for

precisely these types of borrowers. one former mortgage broker in los angeles said the country wide branches in upscale neighbored had to slash their mortgage rates to be competitive with rival banks, but in areas predome in and aboutly -- predominantly minority, rates were higher because they knew borrowers in these neighborhoods had few, if any, alternatives. i was told, i'll put it this way, at country wide santa monica branch, they lost 1%-2% points on a loan. if they broke even, they were lucky. in black areas, the average appointments per loan was two to four percentage points, and you were repremended if you didn't

charge more. the information technology to the incentive pay was designed to ring in maximum profits out of the boom no matter what it costs borrowers. the computer system defaulted to a setting that automatically excluded a borrowers cash reserves from his or her financial statements with the effect of making the borrower to be less financially sound and steered away from lower cost loans into those that were more expensive and more profitable. now, country wide, of course, was not the only lender that appears to have targeted minority borrowers. a recent lawsuit against wells fargo over loans it made in tennessee found that its foreclosure rates in black neighborhoods of memphis are almost 18%, five times the rate than predominantly white neighborhoods and seven times

than predominantly white county neighborhoods. according to a sworn statement by a credit office named mario taylor sited, "the prevailing attitude was african-american customers were not savvy enough to know they were getting a bad loan, so we had 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 over the years, and these punishing loans obviously increase the odds of foreclosure. a study by the atlanta institution of foreclosures in that city found that african-american neighborhoods by census tracts had foreclosures higher than majority white neighborhoods and that's because the newspaper said african-american borrowers were 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. yet, 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 who created this problem, main street is really left to fend for itself. this created a view, a pernicious view that there's 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. now i'd like to turn it over to josh for his insights and interpretations and views on how much fun it was to write a book

together. [laughter] [applause] >> i think she was -- she may not realize she was not kidding. it was delightful writing a book together. it was largely because we both had been involved in this area, her from the writing side, me from the wall street side for very long period, and frankly, we're early in warning about the crisis to come, and it's probably worth taking a step back really into the early chapters of the book because the crisis, i don't think we've contextualized, nobody wants an honest dialogue in order to move past it and rethink our public policy on housing. we talk about home ownership rates, but we never define home ownership, and that really is the root of this crisis, 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 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 there were two options, figure out a way to increase wages sustainably or lower the standards to increase home ownership rate. we embarked among the largest private partnership of this country, and it had all the parties in it, treasury, hud, it had fannie and freddie, the mortgage bankers, the realtors, 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 the map and part of the notion of wrapping ourselves in a culture of ownership, ownership society without ever having a institution about what it was, and we forget that all of the benefits that historically were conveyed by home ownership were real. greater ties to one's community. they are a better place to raise a family, more stable neighborhoods, typically neighborhoods with more focus on educational attainment of the children in those neighbors, but

we never stopped to ask what drove those as part of the policy discussion, and history has shown that it's actually the down payment and the monthly payment of principle in interest in what has been a forced savings plan, a relatively ill-liquid investment where money is paid in and trapped and very difficult to extract 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 month le payments of principle and interest so at about the time of retirement, there was a mortgage burning party, have the generational wealth asset, and we got that, and yet we talk about achieving record levels of home ownership which we didn't

because there was not equity. it was phantom equity. 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 attention to safety and soundness, and we watched as home ownership rates climbed from their historic 62%-64.5% which they were at world war ii to getting to 69% by the end of the millennium, and then we think about the crisis, and the reality is home ownership rates peaked in early 2003 and 2004. where's the crisis of 2004, 2005, 2006, 2007? that's really the story. that's the story of the fact that we perverted all of our definitionings. we watched the industry, fannie

and freddie, later the mortgage bankers, realtors, home builders, community groups 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 incementives to take the more and more risky mortgage products on homes that they already had as a way of extracting the equity in their homes and create incentives for people to build and buy second homes and other properties, another piece not 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%-39% of home sales were second homes and investment properties, okay? that's overhang not touched by

any of the current government initiatives to stabilize the housing market. that's part of the reason that the banks who we put through these troubled asset relief programs still have these troubled assets on balance sheets. we don't want to look at what the housing policy did, what our financial service policy did, and that really we've been seduced by tax policies that insent 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 even as we're starting to talk about dodd-frank and its implementation and rule making 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 to address with it? instead, we've got right back to where we were -- this combing of social policy with financial market, and that's a very toxic brew. when you start ending 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 intended target where historically the lending for first time home buyers, buyers who had limited access, special buyers were sometimes delivered directly through government programs, and if you think back to the gi bill; right? jenni mae programs, fha programs, the goal was to have the government recognize there

is some value in insenting home ownership, but in doing so directly, there's greater control and less likelihood for seepage of profit taking behavior, and fannie and freddie really were at the front end of co-mingling the policies. that really is the departure point that's very important because in 2001, i wrote a paper called housing in a new millennium, home without equity is a rental with debt. [laughter] 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 called subprime 1.0 in the 1990s where we saw a large number of small subprime originators come, and really what they were doing was making

loans still relatively tradition gnat mortgage -- traditional mortgage 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 and accounting games that were found to have occurred in that industry, and it disappeared, and with that, wall street investment banks realized if only they started innovating new products, they could expand the borrower class and increase the home ownership and sell this dream to a larger number of people. fannie and freddy were part -- freddie were a partner in that, and as much as they were at odds in many ways with the incestment -- investment banks and 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 walk into a bank in the community, look the banker in the face, he looked at your history, your employment history, look and think about the regional economics of the community in which you were borrowing and where your job was and make a loan decision, and fannie and freddie realized for efficiency, we can move to automated underwriting, underwriting processes, really change the structure and die namics of the -- die namics of the housing and mortgage finance system, and they did, and we're here. even now as we watch the discussion about dodd-frank, there's a rule on risk retention where any securitizations the

issuer or originator have to hold 5% of the structure. unless the loans in that pool are what's called qualified residential mortgage and out comes the regulators with the proposed rule op what a qualified mortgage is, and you end up seeing the same group, the same partnership, the same unholy alliance of the home builders, mortgage banks, the community groups -- they hold on. if you were to make this the qualified residential mortgage rule, there'd be minorities kept out of home ownership or from the cost of home ownership that would rise. vicehaven't we learned we're not helping people by putting them into products that are not sustainable? perhaps it's time to 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 an example which theoretically should benefit home buyers, but benefits those who itemize taxes and only benefits the middle and really upper middle income and wealthy which we could turn on its head into a tax credit which would be progressive and give incentive to pay down every year as much principle as they can and build real wealth and real savings, could create 529 accounts so -- for mortgages so people can save for a down payment on a tax-free basis if we believe in housing policy as a important social tool, but washington in all of its wisdom, in all of the relationships that we talk about between the trade associations, who on both sides of conk -- this is not a left or right issue -- this really has

become, unfortunately, a senate banking committee house financial service committee and both compete for the same dollars from the same trade groups, and the people this 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 policy, transparency in policy, an 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, with that rive and rant -- [laughter] i'd like to turn it back over. thank you. [applause]

we'll begin the question hour now and come to the microphone with your questions or comments and try to ask questions without many semicolons. [laughter] please begin, and if you're comfortable saying your name, please do that, and gretchen morgenson and joshua rosner will answer the questions. >> hi. i want to play devil's advocate for both of you. there's federal agencies in the government that regulate fannie and freddie. let's suppose hypothetically you were invited to administer that agency, what would you do in

your implementation? >> yeah, first of all the regular laters charged with regulating fannie and freddie in the years leading up to the crisis when the ground work was being laid were really neutralized. they understand well how to defang its regulator, how to co-op congress, make congress really the regulator, and therefore they could buy congress, and have everything under control so for years this regulatory infrastructure over fannie and freddie was a 98-pound weakling and was punished when they tried to talk about safety and soundness issues, it was, you know, drummed out of town. i mean, congress got up and said, you know, 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 fapny and freddie. i think looking back you can't really say you had a good regulatory structure. now, what we would do now, i mean, i think you have to have a somewhat adversary yal relationship with these companies you oversee, and when we interviewed barney frank for the book, we asked him, you know, why were you taking the side of the companies all these years when you could have. really helping the regulator do its job? he said, i felt like there was becoming an adversary relationship there, and we said, well, that's what it's supposed to be. we're not supposed to be, you know, friends and colleagues here, but to be overseeing, so,

you know -- go ahead p >> no, no, no. if i were to summarize the book in a instance, that doesn't mean you don't have to read it -- [laughter] it really would be how fapny and freddie talked the financial service industry that if you capture congress, you capture the regulator, and the industry learned that lesson, and fannie and freddie is the example. you had the regulator in 2002 write the possible future systemic risks posed by fannie and freddie, and the white house asked for his resignation within 24 hours of that. you had the regulator after an accounting scandal it didn't do because frankly in my mind there was a captured examiner who was in charge, but in the aftermath of that scandal, the regulators started doing an investigation,

and a senator called the hud inspector general to do an investigation of the regulator to try to stifle that, okay? frankly, there was this arms in the air finally by i think most of the financial regulators, and not excusing the behavior; it's just the reality of they don't want us to regular lace, what are we going to do? that was co-mingled with the view of hey, people do what's in their self-interest. we'll trust them to do the right thing. >> thank you. >> in the spring of 2008, i taught a course in math and finance where we did present value analysis, duration of a bond measuring risk, formula for pricing options, pricing models, value of risk, and risk of an

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 was not violated by the people who were running these major constitutions. it was incredible. just one comment here and then a question. the course announcement was posted on the website of gw in december of 2007. this was an undergarage watt course -- undergraduate court. i was amazed. i got letters from three staffers at the federal reserve who were going to take this 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 book, i looked at references to goldman sachs. they lost every shady deal

exposed -- for example, ripping off gadhafi i read in the "wall street journal," you know -- [laughter] someone 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] there's not a single economy in the world they couldn't bring to its knees in five years. my question with goldman sachs is this, given the deals, where -- why would anyone in his right mind take the opposite side of 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 badder than ever. >> but that only holds where

there's a real free market. where there's an assumption that there's an informational or i should say a-symmetry of information with buy r and seller, you side with the one who has a-symmetry in their favor. there's an understanding that there's those who are always in the know, always given advanced information, access to levels of government where they know where the outcomes are before they know where the announcements are publicly posed so you're right -- in a closed system that's free market, you're right, you would not take the other side. you -- i'm sorry -- in a free market, you might take the other side because everybody can't be right all the time. there's an assumption and understanding that it's not working fairly so right now you're right -- all i think you're saying is that this is

corporate cronyism. >> you mentioned that goldman sachs was responsible for managing the earnings of fannie -- >> absolutely. >> and they were involved and also to the structured finance deals -- >> well, you know -- >> always benefited goldman sachs and nobody else, so find, but now why are they still in business? that's what i don't understand. [laughter] >> you know, it's also -- i feel uncomfortable with that question only because unfortunately i think focusing so much -- so closely on goldman sachs helps us to forget there's a number of institutions equally culpable that are too big and intertwined and too dangerous frankly for the public good, and we are not addressing those, nor by the

way, even doing digging into what has gone on or what they were involved with because there is a favor ploy. >> thank you. >> he's not defending them. >> exactly, exactly. >> just so you know that. >> to what effect, if any, did repealing class have on the crisis? >> [laughter] >> just a tiny little bit. [laughter] well, glass stegel was the depression era law that served us well for 66 years i think it was. of course, they were, the big financial institutions chipping away at it for years and finally succeeded with the help of robert ruben to annihilate it all together in 1999, and there's a picture in the book of the signing of

grahm-leech-briley and everybody is smiling and laughing and greenspan is there clapping, and it's all a big love fest, and it really was the beginning of the end. 23 -- if you look, there's a wonderful picture of roosevelt signing this into law and nobody is smiling. everybody looks very grim, and it's the deep dark depression, and putting those two pictures is such an interesting juxtaposition. it absolutely had everything to do with the crisis. it allowed the wall street firms to vertically integrate to expand their operations. it was part of the idea, again, that josh mentioned earlier, that allowed them to take even more risks with the, you know, in the misguided notion they would never risk the bank because they were too smart to do that.

it fit into the regulatory view that regulation was not necessary, that regulation was a -- you know, an evil that bankers could be relieded upon to do the right thing, relied upon to come up with their own capital ratios, to determine those kinds of things themselves, and so it was -- it was a real 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 it's difficult to put the genie back into the bottle. >> i think gretchen is spot on. it created this opportunity, frankly, for the banks to compete with the gse's when it came to the morning world; right? fannie and freddie had certain benefits including the fact from a regulatory capital perspective, their mortgage backed securities had low risk waitings, and we saw the basel

committee of the view that the gse's mortgage backed securities should be a lower risk waiting reversed really at the head of the banks and lobbies, and once they did and all the sudden the notion was all mortgage backed securities of equal waiting should've the same risk waiting, you saw banks that had branches become very aggressive in pushing mortgaging 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, using third party originations, and then buying servicing and starting to build all of the information and advantage including the relationships which we have not talked about with the ensurers which were, again, part of the crisis, both the private mortgage ensurers and the bond ensurers 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 stega listen p >> thank you. >> this is such a risk topic, and no pun intended, but i don't know where to start. by saying first of all, i really don't believe that this is so much a financial crisis we're in as it is cultural crisis, and i think we're all culpable. nobody asked for any heads on pikes on this. we are all so willing to go around and have wall street tell us, well, this is just a normal bank statement, and they are preparing for the next 15 years. this will happen again, folks, no question about it. what you described is not capitalism, but economic tyranny, and, again, 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, the wealthy

who put their money into these films, write a book about deportation of these people, and if they don't want to pay their taxes, let them live in sweed p, but don't use my public schools or libraries, 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 them in my e-mail every day, there really are a lot of people who are in that same -- on your wave length, absolutely. i think there is a sense and a colleague and i at the times have been writing articles about why there's no prosecutions, and it's a very interesting question why the dog didn't bark. very hard to come up with the authoritative answer, but one of the answers i did get that made sense to me when you compare this crisis to the snl crisis in which 800 some executives went to jail for a crisis that was far smaller in number in losses

and pain and agony that has been, you know, endured by people, where you are ceo s going to jail, we found one the key reasons this occurred because the regulators in the years when things were good, years leading up to the mania and in the map ya were not ding their job, reigning in the practices, taking names, doing investigations so that when the bubble burst, they had no information to bring cases, and so, again, they -- this regulatory capture not only had the initial problem of not raining -- of failing to reign 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 all go quietly and forget that this ever happened so i hear your pape. 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 that we both agree that i think that was part of what drove us 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 charge of redefining the system going forward and forgetting the fact to my mind as a housen analyst, the largest impact of this crisis has not yet been felt. the largest impact of this crisis will be felt over the next 19 years as the largest generation in american history retires with less equity in what

has historically been the largest retirement in wealth transfer asset, as we have a senior homelessness problem as a result, as we end up with a failure to fix the system to insent the pay down and the growth of the pay down of death and growth of personal savings, and that becomes a real piece of the coming crisis because it's going to happen likely at the same time that our u.s. trash ri is -- treasury is forced to accept cuts in the social safety net. >> elaborating on something you touched on, to what do you attribute the utter passivity of the department of justice which continues to the present day? i ask that as a former federal prosecutor -- >> i'm going to ask you. [laughter] >> i don't know. i could write indictment on cases in 30 minutes from what i read, and convicting these people is like shooting fishes in the barrel. >> it's the to littization --

to -- to ticks, 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 unfortunately had to learn to live with. i don't agree we have to, but we have to that gosh, if you do anything like that, you risk destabilizing these very same institutions that we spent so much effort trying to make look like they are solvent. >> this never guided the justice department in the past, and i want to know what happened. is the fix in, is that what you're suggesting? >> it's hard to draw another conclusion. i'm not an answer or a party to the 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 foment and there was not a crime committed. it's very difficult to -- you have to suspend your disbelief far too long to draw that conclusion. again, it is an appetite to prosecute that is not there. i think there's a fear tack -- factor of losing the case. they say they are complex cases, paper cases, you don't have a victim to point to who is, you know, dead on the ground. i mean, there are many, many excuses given. i -- i buy none of them. i can only -- >> there's no real investigation. >> 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 angela brought by the fcc where it appeared to have extremely damning information, e mails saying the

loans are poisen, toxic, these kinds of descriptions, and at the same time publicly crowing about how good his company is doing financially, and, you know, providing the best loan for all customers. that's -- >> and selling stock. >> and selling stock throughout. that's a layout, but i'm not a prosecutor or a lawyer -- >> you can send them to the slammer for life on that. i can't understand why that has not been done. >> i want to make sure all those in line get a chance to make their point, ask their questions so we're going to end with last woman in line. >> no point, just a question or two. my glass question got asked so i'm left with what do you think of dodd-frank, the response to this crisis, and any heros? >> dodd-frank in my view really

missed the big one which is too big to fail. it did nothing about cutting down these institutions to a manageable size, a size that does not imperil the taxpayer. that's the key failing in dodd-frank. another failing is, i think, it has left hundreds of rules to be made by regulator, and so therefore providing a second manipulation possibility for the industry so they got their first chance when they were talking about the legislation, writing the legislation, got their first chance to manipulate, and now they can manipulate the regulators. >> is it better than nothing in >> there's parts that are fine and good, but i think a 3,000-page law, okay, glass was 32 pages, 3,000 pages, you know, it's way overdone and 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. why not add one paragraph that essentially said any institution that has to rely on extraordinary government asset purchases, debt guarantees more than 60 day at the windows has senior officers barred from employment as consultant or otherwise for a period of five years. if you did that, the companies would shrink themselves to the point to manage their risk or spend money on increasing the risk management to the point where they were away from the concerns. 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 left everything to the regulators to define. >> and you asked about heros. we had some heros. there were some folks at the

cbo, the congressional budget office, a wonderful venn yet where they came up against fannie mae in 1995 part of the congressional act in 1992, the safety and soundness act creating a new regulator for fannie and freddy, treasury, 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'kneel, the head of cbo said they felt like they were visited by the mafia and 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 it all costs they had to protect it. we have cbo people standing up against the pressure from fannie mae.

are other -- there are other people who saw what was coming. people in the georgia area, first to wave the flag and call out the rating agencies for inserting themselves in a process where jazz had the toughest predatory lending law in the 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 ratings agencies said they would not rate those lopes so we had people along the way who were jumping up and down and warning so there's heros in the book i'm glad to say. >> thank you. >> you make a strong case for the central role of housing policy and the behavior of the gse's as factors in the buildup to the crisis, but i've never

been able to understand how 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 possible malfeasance who contributed to the institutions. i sue no causal connections to the housing policies with mistakes in investment banks. what's your theory of the mistakes? >> bear stearns was a big player and the leverage the firms coupled take on was something henry paulson allowed, to increase the leverage that the firms could take on their books, and that really led them dop the path to fruition because only a

small loss was magnified by the leverage that they had. there was tremendous amount of profitability and risk taking relating to mortgages on wall street. look at country wide, 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 residential mortgage was the lowest risk asset from a capital perspective, okay? that's a big piece of why they went into this, why they lev ramminged it -- lev ramminged it and when you didn't have buyers for them, you took the tranches and bundled them into more debt obligations and then multiplied that further and further, and if you looked back in the e-mail files of the financial cry, one of the things you find is that there are other

institutions that would have gone down because they retained risk. you have a risk retention rule saying we should have institutions retape risk on the notion that certainly if they drink the poise p, they won't feed it to others. they didn't realize what they were serving up was poisen and what you saw in 2007, you saw institutions bear was ignoring it, merrill didn't realize the exposures until in hot water with goldman and others still many had problems, were quickly trying to off load what they had as remaining risk as quickly as they could so those instruments, the nontransparency to look into a cdo because they were not qualified buyers with the right to are very central to the

crisis. >> well, i think you've explained why there were severe temptations to the corporate executives, but have not explain why they yielded to the temptations. after all, they played to make money, and they lost money. >> they put money on their stalks -- >> well, that line of argument, i think, is then another kind of missing line of argument. the question is can you trust the executives of these institutions to have the interest of the institution as such as heart because it would appear in these episodes that the interest of the institutions might have been sacrificed to those of the executives, and i think again i think that that phenomena also deserves a lot of attention. >> agreed.

>> looking forward and thinking bow the next election and i'm assuming the answer to the question is no, but what do you think is the possibility of being a discussion of housing policy going forward in the next election? it seems like the obama plan, and i guess the plans republicans are talking about are different. >> none of them are housing policy. >> nun of hem are housing policy? >> housing policy is actually a broader discussion about what we need to do by way of housing our population, representing versus owning, do we need mobility because there's a changing social reality and demographics? do we need to change the tax incentive structures to meet whatever we decide as social policy goals for housing policy? do we want to have the social policy transmitted through private corporations or on the

government's balance sheet? that's a housing policy discussion. we're not having that. really we're having a 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. do i have any expectation of either of the discussions for a real discussion of housing policy part of the election? probably not, so you're right. even in terms of the gse's there's an understanding on both sides that we want to kick that one down the road until after the next presidential election. >> don't forget we're also still in the depths of the housing crisis because foreclosures are still massive. people are massively underwater. there's a sense that we can't deal with this right now. >> although, that's an opportunity. >> yeah, exactly. >> that's an opportunity 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. >> speaking of the ongoing crisis, i wanted to ask about the programs to help borrowers who are in trouble, and my reason for this is perm knowledge and experience. one is the mortgage we hold on our house in washington which is in the neighborhood where house prices have risen, 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 -- >> wow! >> because your mortgage is held by fannie mae, you qualify.

by the end of the week, we had a no appraisal, no-cost, no-documentation of income refinance at a lower rate. it was wonderful. it was the best ever done. >> you must know somebody in high places. >> no, no. anyway, the other mortgage is that of my contractor who is hispanic, lives in alexandria, under water, has an arm originateed by country wide, and now it's serviced at least by bank of america. they are 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 -- 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. san chez, and he told them everything was going to be fine. the contractor said they were going to move help and earth. the next day when mr. sanchez talked them into signing the documents, it turned out mr. sanchez is a sleazy lawyer who was getting them into a contract to spend something like $2500 to negotiate the mortgage that they have been refinancing with no guarantee of success. fortunately, they were savvy enough. >> thank goodness. >> and my