here with you and engaged customers as well. it's really fantastic and it's wonderful to meet david, and you 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 24, and among the questions that we always get, are often get, from interviewers, buyers of the book, e-mail and my e-mail account at the times, what surprised you the most about your reporting and investigation that you both did to come out with this book? ..

>> 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 an avalanche of events that couldn't be helped, we really believe there were actual parties involved laying the ground work. 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

positions 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 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 loan 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 controls, 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 prims than -- 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 rate 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 acquire inside 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 its 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 precisely these types of borrowers. one former mortgage broker in los angeles said the countrywide branches in upscale neighborhoods like beverly hills or santa monica had to slash their mortgage rates to be competitive with rival banks, but in areas that are predominantly minority, countrywide's rates were far higher because company executives knew 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 boar roars. borrowers. a recent lawsuit against wells fargo over loans that it made in tennessee found its 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 a 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. if -- 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 majority white neighborhoods.

they are -- that's because the newspaper said 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 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. for itself. unfortunately, this has created a view, t 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, were 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. i don't think anyone wants to have the honest dialogue that needs to be had in order to move past it and 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 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, typically 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 results for most of the postwar 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-burning party, have the largest retirement asset and intergenerational wealth transfer asset, and we've gutted

that. and yet we talk 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 attention to safety and soundness. and we watched as home ownership rates climbed from their historic 62 to 64.5% which they'd been at since world war ii to 1995 starting to rise to getting to 69.5% by the end of the millennium. and then we think about this crisis. and the reality is home ownership rates peaked in late 2003, early 2004. so where'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 -- 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 incentives 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? the 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 iraq that the -- 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 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 ian -- 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. 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 peru. when you -- toxic brew. when you start handing the opportunity for social policy goals and subsidies to be delivered through private market players, there's gonna 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 directly through government programs, and if you think back to the g.i. bill, right? and jimny 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 bayer. and -- behavior. and fannie and freddie really were at the front end of comingling the financial policy with market policy. and that really is the departure point that i think is very important because in 2001 i wrote a paper called "housing in 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 products, 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 and accounting games that were found to have occurred at that industry, and it disappeared. and with that wall street investment banks realized that if only they started innovating new products, 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. 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 history, he would look and think about the regional economics of the community in which you were borrowing and where your job was, and he would make a loan decision. and fannie and freddie realized for efficiency in an instant gratification world, we can move to automated underwriting, we could really change the structure and 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 or 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 residential mortgages. and out comes the regulators with their proposed rule on what a qualified residential mortgage is, and you end up seeing the same group, the same partnership, the same unholy alliance of the home builders, the mortgage bankers, the banks, the community groups, okay? say, hold on. if you were to make this 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? practice 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 home buyers but really only benefits those who itemize their taxes, only the upper middle in testimony and wealthy which we could turn on its head and turn into a principal equity tax credit which would, therefore, be progressive, right? it would give incentive for people to pay down every year as much principal as they can and build real wealth and real savings. we could create 59 accounts so that -- 529 accounts for mortgages so people can save for a down payment on a tax-free basis as we believe in housing policy as a tool for savings. but washington in all of its was.com in if all of -- in all

of its wisdom between the trade associations who own both sides of congress, this really has become, unfortunately, a senate banking committee, house financial service committee, they both compete for the same dollars, 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, 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, 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 will answer the questions. [inaudible conversations] >> 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. um, 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 its regulator so, therefore, they could buy congress, and then 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, that 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 their legs and say, 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, um, 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, he -- 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, you know, friends and colleagues here. they're supposed to be overseeing. so, you know -- >> no, no, no. i think, you know, 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, you had the director of their 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 regulator 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 gonna do. now, that was comingled with this view of, hey, people do it in their self-interests, and none of these companies are going to intentionally drive themselves 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, black shoals formula for pricing options, capitalist

pricing models, value at risk and valuation of 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 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 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 book, 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 read anything the wheat journal -- reading in "the wall street journal." [laughter] you know, a colleague of mine made a joke that if we could get the major investment banking in china -- banks in china and russia and japan, we could cut our defense budget by $500 billion a year because there's not a single economy in the world they couldn't bring to its knees in five years. [laughter] but my question with goldman sachs is this: given it 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 badder 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 was everyone can't be right all the time, but i think there's not a free market operating here. i think there an assumption and an 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, and we haven't done anything to address that. >> 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 -- >> that always benefited goldman sachs and no one else. and fine. but now why are they still in the 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, or 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 really even doing much digging into what's gone on or what they've been involved with because there is a favorite whipping boy. >> thank you. >> but he's not, he's not defending goldman sachs. >> no, exactly. >> just so you know that. but -- >> what effect, if any, did repealing glass-steagall have on the crisis? [laughter] >> just a tiny little bit. [laughter] um, well, glass steigel, of course, was the depression-era law that served us very well for 66 years, i think it was. of course, they were, you know, the big financial institutions were chipping away at it for years. finally succeeded with the help of robert rubin to annihilate it altogether in the 1999. and there's a picture in the

book of the signing of graham-leech-bliley which was the repeal of glass steigel, and everybody's smiling, and everybody's laughing, and greenspan is there clapping, and it's all a big love fest. and it really was the beginning of the end. if you look, there's a wonderful picture of president roosevelt signing glass-steigel 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 in the book, but putting them together was 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. um, 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 fit 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. so it was a real see 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, um, unfortunately, it's very difficult to put the genie back into the bottle. >> i think, 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 weightings. and we saw the basel committee of the view that the gs es mortgage-backed securities should be a lower risk weighting, reversed really 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, it was 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 model line bond insurers who were integral and central to the crisis. and part of the goal of that financial supermarket that was spended with the repeal of glass-steagall. >> 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 it is a cultural crisis. and i think we're all culpable because nobody has asked for any head on pikes in this. you know, we're all so willing to go around and have wall street tell us, well, this was just a normal business cycle, and they're already preparing us for the next 15 years. this is 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 victims of that. and i appreciate you for writing your book. i wish you would also look into some, you know, other topics

about people who have provided the money, the wealthy who put a lot of money in sweden, these 4500 -- 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 public schools. just go where you want to go and where your money is going. thank you. >> well, you don't read my e-mail because there's some people looking for heads on spikes in my e-mail every day. there really are a lot of people who are in that same, on your wavelength, absolutely. 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 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 that -- we both agree, i think that was 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 charge of redefining the system going forward and forgetting the fact that, 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 and intergenerational wealth transfer asset. we have a senior homelessness problem as a result. as we end up with a failure to fix the system to incent the paydown and the growth of, the paydown 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. >> elaborating a little bit on something that 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. >> if i'm going to ask you. [laughter] >> well, i don't know. i could write an indictment on these cases just in what i read in the newspapers in 30 minutes.

convicting these people would be like shooting fish in a bail. >> 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've 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? >> are well, it's hard to draw any other conclusion, honestly. i don't know the answer. i am not a party to these e-mails going back and forth. um, you know, it's, 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 ask 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 appetite to prosecute that suspect there. i think there is a fear factor of losing the case. they say these are complex cases, these are paper cases, these are not -- you don't have a victim to point to, you know, who is dead on the ground. e mean -- 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 that these loans are poison, toxic, these kinds of descriptions and at the same time publicly youing about how good -- crowing about how good his company is doing, financially sound and, you know, providing the best loans for customers -- >> and selling stocks. >> that seems to me to be a layup, but i am not a prosecutor, and i am not a lawyer, so, unfortunately -- >> you could send them 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 gonna end with the last woman in the 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. 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 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 that a 3,000-page law, okay? glass-steagall was 32 pages. 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. not to, 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 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 from employment as a regulated entity for a period of five years. if you did that, these companies would shrink to the point where they could manage risk or spend money to the point where they ameliorated those 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 did leave everything to the

regulators to define. >> and you had asked about heros. we had heros. there were some folks at the cbo, we have a wonderful vignette where they came up against fannie mae in 1995 when they were part of the congressional, part of the congress act in be '32 which was the safety and soundness act that created a new regulator for 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. um, 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. 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 it all cost -- at all costs they had to protect it. so we have cbo people who were,

you know, standing up against the pressure from fannie may. 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, um, inserting themselves in if a process where georgia had the most, toughest predator 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 agency said they would not rate those loans. so we had people along the way who were jumping up and down in warning, but -- 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 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, and 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 stearns is 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 importuned the sec to allow, it was to increase the leverage

that these firms could take on their books. that really led them down the path to perdition because only a small loss really was magnified by the leverage that they had. there was a tremendous amount of profitability and risk taking related to mortgages on wall street. look at 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 piece 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 more leveraged instruments, 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 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 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 others who still many of them 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 this i you've explained why -- 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 play today make money -- >> [inaudible conversations] >> >> well, that line of argument is, i think, another 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 interest 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 that, that

phenomenon also deserves a lot of attention. >> agreed. >> hi. looking forward and thinking about the next election, and i'm assuming the answer to the 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 republicans 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 goal or housing policy goals? do we want to have this 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 that we're heading down which is not a housing policy discussion or a real substantive discussion of 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 a, i think, an understanding that we want to kick that one down the road until after the next presidential election. >> don't forget that we're also still in the depths of the housing crisis because foreclosures are still massive, people are massively underwater. so there's a sense that we can't

deal with that right now -- >> although that's an opportunity. >> yeah, exactly. >> both to use as a catalyst for 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. l. >> um, speaking of the ongoing crisis, i wanted to ask, um, about the programs 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 if 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 and said -- >> wow. >> -- because your mortgage is

held by freddie mac, you qualify for this program. [laughter] 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, it was the best refinance i've ever done. >> you must know somebody in high places. >> no, no. [laughter] wait. anyway, the other mortgage, though, 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 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, 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 them everything was going to be fine. as my contractor said, they were gown to move heaven and -- they were going to move heaven and earth. only the next day when mr. sanchez sent him documents and talked him into signing the documents, it turned out that mr. sanchez is a sleazy lawyer who was getting them into a contract to spend something like $2500 to negotiate the mortgage that they've been -- 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 maybe that 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 these programs aren't getting the help they need. >> well, i certainly would say that the treasury's program, the hamp program has been an unmitigated disaster from the very outset. it was just badly conceived, it really was almost the worst possible combination of kind of, um, people coming up with an idea of how to not help people is really how it ended up working. bank of america, you know, again, my e-mail box is filled with stories where they do, they lose the paperwork, they don't,

you know, allow the modification. there just does not seem to be a real sense either in the private sector or the public sector to make, make a rational, intelligent decision about who should be helped and who should not be helped. and so i just think that the government has done a woeful job. and, again, i think as i said as the outset, it's contributed to this idea that main street really got it in the neck, and everybody else, you know, walked away with a lot of money. ..

>> getting into paid cash into a house where they haven't done the appraisal as you said, they haven't had any income verification. there's a big difference though on top of that between the two, comparing apples and oranges. fannie and freddie our government guarantee. they own the credit risk already. tank of america, the likely it is your contractors mortgage is not even held by bank of america, it still biting mortgage-backed hold, and those investors have to be considered. the problem is bank of america is a service or who also owns the largest portfolio of second liens and home-equity lines. so there's risk to them on that,

depending on what they do on the first mortgage. you're right that this is a problematic situation, and the government isn't interested in dealing with it. one of the things is before you can have in that example bank of america treat borrowers well, they need to be unconflicted in the relationship between the second lien that build on the balance sheet and the first lien that they service for people like you. >> first, thanks to much for writing the book. i have a couple of questions. right now and looks like fannie and freddie might be possible by the end of 2012 may be going into 2013 setting aside the 10% dividend that they might of the treasury, and at the point i'm sure there will be pressure to bring them out of conservatorship, but they have patented most of the mortgage business. they hold over 40 patents now

and they're continuing to get patents. so they patented everything from the mortgage application process all the way to securitization. and they also own a lot of technology and information on every single homeowner in the country. i'm not sure those patents should have ever been granted, but i guess i'm asking do you think they'll ever be put in public domain along with the information, technology? what you think will happen? are we going back to business as usual? >> i think i know the answer you're going to give. >> there's this great divide right now in washington between those who are afraid that if we wait too long to address it, i.e. wait until after the next presidential election, there's going to be a push because they're profitable just to let's put them back out there, let's bring them back into outlook market, everything's okay and we'll tighten up regulation around the edge. and then you've got those are

saying let's get rid of them. i actually am agnostic. there is value to the franchises. there's great value in the patent portfolios, and the information that they have. which i think you could use if you could figure out a way to make not government sponsored enterprises, but enterprise is that were fully private. i think there's some value in that because there's value in information. or you can offer to the entire market, open it up. but the debate right now unfortunately is do we have fannie and freddie as fannie and freddie, or do we have the mortgage backs as of the next fannie and freddie. and so i think really the question is, should either of those groups be the mechanisms for social policy delivery, or should they really be nothing more than mortgage market structure, financial market intermediaries to the mortgage finance system? and the likelihood is that

fannie and freddie at this point of going to come out the other side of things, not with the same names, not with the same structure, but i think that some of the franchise i would be retained. it's still unclear as to in what manner. >> thank you very much, gretchen and josh. [applause] >> you can watch this and other programs online at booktv.org. >> now on your screen is professor robert pape of the university of chicago. he is the author of "dying to win" and he's just written a follow-up to that, bestseller called "cutting the fuse." dr. ping, what is this book about? >> this book looks at suicide terrorism in five years after i published dying to win. there is more data, more patterns and more policies to look at and examine, they're terribly important for specific foreign policy decisions we need

to make in the coming years. >> what did you find? >> what i found is that over 95% of all suicide terrorist attacks are driven by not religion, but specific circumstance, foreign occupation. that is, large-scale military presence on territory that terrorists prize. that is the main trigger, the main point of radicalization that drives people from simply being angry to going to the point of willing to kill themselves on missions to kill others. >> how many suicide attacks have there been annually? >> just in the last few years over 300 a year. and, in fact, suicide terrorism has been exploding around the world. if we were to go back 10 years, say the year 2000, the year before 9/11, there were just 20

suicide attacks around the world. one of those 20 against the u.s. was anti-american inspired. in the last year, over 300 suicide attacks around the world. they are not thinly scattered. they are concentrated, concentrated in the area of american occupation, especially afghanistan, especially iraq, and increasingly the spillover of afghanistan into pakistan is causing huge number of attacks there. and so what's been occurring is not just a large number of suicide attacks, but a large number of anti-american inspired suicide attacks. >> besides the obvious policy of pulling out is there another policy? >> absolutely. because pulling out simply abandons our interest, ignores our interest. with this book suggest is a middleground policy called offshore balancing. offshore balancing continues to

pursue our core security interests and obligations in overseas regions, but does so with over the horizon air power, naval power, intelligence assets, relies on economic assets and political tools. and this is the core policy that we pursue as the united states is for decades the major regions of the world such as the middle east with great success. and we should return to this policy. >> can you give a specific about how we pursue this policy in the middle east? >> in the 1970s and '80s the united states hard-core interest in the middle east including on the persian gulf, and we maintained and secured those interests without stationing a single combat soldier on the arabian peninsula. instead, we relied on allies, especially iraq and saudi arabia. we relied on over the horizon offshore military power carriers

essentially in the arabian peninsula. and we relied on a series of bases so that we could put troops in and out if we needed them, but not maintain them near permanently year after year after year. when we abandoned that policy in the mid 1990s, much to our detriment, because by abandoning a policy of offshore shipping to onshore heavy ground presence, what we did was inadvertently give terrorist leaders the key tools to recruit suicide attackers to kill us. >> robert pape, afghanistan, how do you offshore afghanistan? >> you offshore afghanistan over a period of two or three years. not an abrupt policy change. and by the way, similar to how we did this in iraq and how we are doing it in iraq. notice over the past three years we have been transitioning from heavy onshore presence by

year-by-year withdrawing about a third of the troops. and notice how in iraq it has produced more stability. afghanistan we should follow more policy. over the course of the next two or three years we should withdraw about a third of the troops a year, and along the way we should also rely more and more on economic tools to achieve our nationbuilding goals in the country. >> dr. pape, why do you think there hasn't been a suicide bomber in the u.s. get? >> i think it's not because the bad guys haven't tried. in fact, you can look at the newspapers almost every year and see foiled plot after foiled plot. the reason we haven't had suicide attacks in the united states, the main reason is because we have adopted an action a series of defenses, especially immigration control, preventing immigration from countries that we are occupying. so for instance, if you're an iraqi and you want to try to get

into the united states since we invaded and occupied iraq, good luck. we don't even let in people that actually risk their lives for us which is kind of a moral dilemma that we face. but the bottom line is that we have a top did important security measures to prevent incoming people from areas we occupy. that more than anything else has taken the steam out of the threat to the united states. >> in your book to read "gq" profiled any the suicide bombers? how easy is it to make a suicide vest, to put together a suicide bomb? >> the actual technicalities of putting together a bomb are not all that difficult. however, there is a bit of an expertise involved which is why most suicide bombers are walking volunteers, not longtime members of a terrorist group is to go to join a group. why are they joined the group? two reasons. they need to learn how to kill

people. it's easy to kill yourself, not so easy to actually kill others. although it can be learned pretty quickly. then secondarily they want credit. they want the social prestige that comes from communities of doing the attack for them. and the terrorist groups do that by releasing martyr videos after the fact. >> how much does it cost to go together like a suicide vest? >> a suicide vest easily less than a thousand dollars. most of the money that, in fact, will go into a suicide vest is not coming from the blasting caps, it's not coming from the actual test itself. it's literally just coming from the fact that you need to pay somebody, someone who can essentially do this part-time on a regular basis. and the reason is because you need a bit of familiarity, familiarity with things like blasting caps so you don't simply blow yourself up.

because the pointer of a suicide attack remember is not simply to kill yourself. that's the easy part, but the difficult challenge is to kill somebody else. and that's what takes that little special expertise and you have to basically pay someone to stand ready part-time. >> robert pape, how did you get interested in researching this topic? again, "dying to win" your first book, "cutting the fuse" follow-up. >> it sort of came out of an accident before he started studying terrorism i spent 15 years studying air power. on 9/11 itself there are lots of questions related to how many people died that day. because of the expertise on airpower, i could come on television programs and say that had this been an air attack we would say that the floors where the cruise missiles hit would be engulfed by a fire and people from that point on down would have a chance to get out, and so

could get out and from people that point on up couldn't and wouldn't. that allowed me on the night of 9/11 to estimate somewhere between three and 7000 people died that day, which, of course, for the meeting was helpful. since there were no terrorism experts i was asked tons of questions about suicide terrorism, terrorism in general. and that's when i began to really research the phenomena which i've not really done before. >> what do you teach your at university of chicago? >> national security affairs in general. i teach courses on strategy. i teach courses on international politics in general, but international politics. nick job be teaching a course on humanitarian intervention. >> who is your co-author, james feldman? >> james feldman is the person who hired me when i taught in the air force in the 1990s. he is a retired colonel from the air force, professor, ph.d from h