RAY SUAREZ: Over the past year, a lot of dominoes have tumbled in America. For years, lenders made increasingly risky loans; homeowners defaulted and lost their houses; lenders, like Countrywide, collapsed; then the banks, which held billions in commercial paper backed by bundled, foreclosed homes, teetered.
Some, like Bear Stearns and Washington Mutual, collapsed, too, along with the Dow and retirement accounts.
ELIZABETH WARREN, chair, congressional oversight panel: The people who are losing now and losing big time are the ones who never took those risks.
RAY SUAREZ: Harvard professor and consumer credit expert Elizabeth Warren came to Washington to oversee TARP, the Troubled Asset Relief Program rushed into law last fall to stop the crisis.
REP. ELLEN TAUSCHER, D-Calif.: On this vote, the yeas are 263, the nays are 171. The motion is adopted.
RAY SUAREZ: The idea seemed simple, though huge: The government would spend $700 billion to buy up the mortgage-backed securities poisoning the balance sheets of banks and other institutions and money would flow again. That didn’t work, but Warren’s panel stayed in business to keep an eye on the emergency response.
HENRY PAULSON, former Treasury secretary: Today I am announcing that the Treasury will purchase equity stakes in a wide variety of banks and thrifts.
Deregulation was deliberate choice
RAY SUAREZ: Along with the inspector general and the Government Accountability Office, the TARP law created Warren's oversight panel to figure out whether the program worked.
The board issued its first report in December. It said the initial TARP outlays lacked transparency and were hard to track.
This week, Warren's panel issued a second assessment that was somewhat outside the purview of the group. Calling it a "special report," the oversight board focused not on the TARP, but on the system that made it a necessity.
Warren's group said the federal government needs to re-think how it regulates the financial and mortgage markets. But first, Warren said, we have to understand why the system failed in the first place.
ELIZABETH WARREN: It failed to do it in two ways. One is that financial products kept innovating. They kept changing, right?
We have a lot of things that are trading in the marketplace out there for a lot of money that didn't even exist 15 years ago. And every time these new things got invented, regulation didn't step up to the plate. It didn't readjust.
We have a whole shadow market, for example, today that didn't exist 20 years ago. And so there is no regulatory regime about it. But more importantly, the system failed because we really took the direction of deregulation.
RAY SUAREZ: Warren said years of very low interest rates threw gasoline on the fires begun by lack of lending regulation.
ELIZABETH WARREN: What we've got now is a world in which not only, based on the last 10 years, are loaded to the eyeballs with debt, even in good times, not only have they got mom and dad in the workplace, and, you know, put the dog to work, if they could. They've done -- you know, they're carrying second jobs. They're flat out. They're doing all they can.
They're committed to mortgages. The cost of their health insurance has gone up. The cost of child care has gone up. These have gone up way faster than inflation has gone up. These are families under enormous economic stress.
JOHN SUNUNU (R), former New Hampshire senator: The suggestion that we've deregulated since 1980 I think is incorrect.
Different views on government role
RAY SUAREZ: Former Sen. John Sununu also sits on the five-member oversight panel. The New Hampshire Republican, along with another board member, Texas Republican Congressman Jeb Hensarling, dissented from Warren's report.
JOHN SUNUNU: Congress has passed a number of new requirements, truth in lending and disclosure, trying to improve transparency in mortgages and other areas, and they didn't deal with the systemic risk and the weaknesses in the system.
And so what we did is, first, go back and be clear about where the problems were. Now, remember we had a very loose monetary policy, low interest rates throughout the decade of the 2000s. We had the GSEs, Fannie Mae and Freddie Mac, that started buying up securities of subprime and Alt-A lower-quality mortgages.
RAY SUAREZ: The GSEs are government-sponsored entities. Sununu said, even if the laws already on the books had been enforced to the letter, plenty of these problems would have come anyway.
Warren disagreed, saying the crisis was preventable. She and the two other Democrats on the panel said a broader financial marketplace re-ordering is needed.
ELIZABETH WARREN: If we had had just three basic regulations, any one of the three -- not even all three -- basic regulations in place, we wouldn't have gotten to where we are today. Let me just do them real quick.
If we had had basic consumer protection in place that would have prevented the crazy mortgage market schemes from ever taking off, then we would not have 2 million families facing foreclosure. We would also, more importantly, not have toxic assets moving throughout the system.
Gauging asset value difficult
RAY SUAREZ: The credit agencies that appraised those assets as healthy, AAA-rated securities were a major contributor to the problem. Warren said they, too, need reform.
ELIZABETH WARREN: If we had had just basic decent regulation over these credit-rating agencies so that the toxic assets that came out of these home mortgages did not get AAA ratings, then they never would have made it into pension funds, into state retirement funds, into the assets for financial institutions, and we would not have destabilized the system.
RAY SUAREZ: Warren's majority also called for a new, congressionally chartered regulator to monitor "systemic risk." That monitor would help guard against entities becoming "too big to fail."
But could the original troubled asset plan ever have worked? Sununu pointed to a core problem with the asset purchase plan.
JOHN SUNUNU: Because it's very hard to set the price for those assets. If you buy at a high price that some financial institutions still hold the assets for on their books, you're going to take those assets in, they're going to do poorly, you're going to have losses, big taxpayer costs. And let's face it: There will be a public outcry.
Problems started at micro level
RAY SUAREZ: One idea now circulating among the administration's new economic team is the creation of a large government bank to pull all of the bad assets off the books of U.S. institutions, in hopes that they will start lending again. Neither Warren nor Sununu was enthusiastic about a new, so-called "bad bank."
Warren said what's needed is a fundamental change in the role of Americans in their own financial system.
ELIZABETH WARREN: What we're really talking about is that a whole market was built on the notion that homeowners were going to pay off on these really terrible mortgages, that somehow all these families across America who had these teaser-rate mortgages for which their incomes would cover only the first two years and never cover the third year and beyond, that somehow they were all going to pay off on these.
The government's looking around. It's looking for different places to try to fix this. But we have to remember the problem started at the household level in the United States and then echoed on up. And, in many ways, that's where the solution will start, too.
RAY SUAREZ: So does that mean revaluing America's housing stock?
ELIZABETH WARREN: It may. It absolutely may.
RAY SUAREZ: Not easy to do.
ELIZABETH WARREN: No. But injecting billions of dollars into banks is not easy to do and telling people that their grandchildren will be paying this off, that's not easy, either. We don't -- look, we're past easy solutions.
RAY SUAREZ: The oversight panel met this week with Treasury Secretary Geithner and other Obama administration economic officials to discuss how the TARP has been used to date and how it should be used down the road.