The Financial Crisis: the FRONTLINE interviews
Money, Power, & Wall Street
sponsored by Duke Sanford School of Public Policy
The anger that grew on how the banks were dealt with, along with the amount of money being spent and everything else, came back to haunt the Obama administration. The midterms came about, and, I mean, what was the reality that they found themselves in?
Well, I think by 2010, of course, what people had seen was massive assistance to the financial sector. Yet at the same time, homeowners, people without jobs were left in many respects to fend for themselves. So, you know, there was anger that had built up, and that always accrues to the detriment of those that are in power. But I do think there was a golden opportunity lost in the wake of this crisis to bring in fresh ideas, a fresh team essentially, to examine what we had done over the last two decades and to talk about how we could reverse the damage and remake the economy so that we had a financial system that could support real growth in this country.
And, you know, it really is striking. Take a look, for just a minute, about what we did for banks and what we did for homeowners. Trillions of dollars going to the banks -- 24 separate programs of financial assistance, TARP obviously being the crown jewel or the centerpiece of that program, $700 billion.
For homeowners, we had a series of anemic efforts to try to help people stay in their homes. Less than a million people have been helped by HAMP [Home Affordable Modification Program], which is the main program to help people modify their mortgages. So we are now in a place today where 11 million households owe more on their mortgages than their homes. The first wave of foreclosures in this country were in the people that got all those loans that probably never should have been made. The second wave happened when millions of people lost their job. And now the third wave that is happening are millions of people who are underwater so badly that they just know that there is no hope that they will ever have equity in their homes, and they are beginning to walk away. Those homeowners, those underwater homeowners, are underwater by about $700 billion, and not enough has been done to help them.
It's striking that we did so much for the banks. Yet what we haven't done is lowered the principal amount for homeowners so they could stay in their homes so we could restart the housing market. And it really is kind of a striking dichotomy between what the most powerful banks got and what tens of millions of homeowners got.
People are angry at the banks. People feel like the banks got us into this trouble, and you say it's the regulators. ...
It's not just the regulators, and it's not just the banks. There's an underlying sociological phenomenon which is what really got us to think there would be a crisis, and that's this: Middle-class America has been totally left behind for the last 15 or so years. Median income, adjusted for inflation, has gone nowhere.
But everybody wants to live a little bit better each year than they did before, and the solution that American families found to that dilemma was to borrow more. Along about '04 and '05, which is when the securitization of mortgages really took off, there would've otherwise been a big problem with other forms of credit.
What happened was, what would've been a medium-sized problem then got rolled into a gigantic problem because of the securitizations, the pop up in real estate values, and the change in loan-to-value.
People didn't run up credit card debt, they just used their houses as ATMs.
Yeah, and there were literally dozens and dozens of instances in each of the banks we bought where what was the reason the guy took out a mortgage? He wanted to buy a new car. Or he wanted to do something else, buy a boat, buy a vacation home, take a trip. Those are strange reasons for putting a mortgage on your house, but the people didn't feel they had an alternative.
And they were marketed that.
They were marketed that way, but they were receptive because it's natural to want to live a little better each year than you did the year before.
What got us going on the subprime thing was we said, wait a minute. House prices can't go up forever. They've already been spiking way above the long-term trend.
Second, the family indebtedness is getting out of proportion. Then with all these teaser rates, that was an accident waiting to happen. That's again something where government could've stepped in.
Let's begin with Occupy Wall Street. What impact do you think they're having and [what] do you feel that they will spawn these ideas into the next few years?
I really don't think Occupy Wall Street is having much of an impact, and I'm not sure that it will. …
One of the problems is that the Occupy Wall Street movement tapped into a vein of emotion that just wasn't going to last forever. It lasted for a brief period of time and it didn't result in a change in policy. I think Wall Street was very effective in waiting out that surge of emotion. And so, I'm not optimistic that there will be changes in the long term.
But haven't they tapped into something fundamental, that 1 percent of this country are really going to continue to exploit and benefit from the wealth of this country, and 99 percent will be stuck?
I think that is true and it is fundamental. But what also is fundamental is that the power structure of the way that we're governed is set up to benefit those 1 percent. And the way that campaigns are financed, the way that money is spent on lobbying and politicians is such that the 99 percent really doesn't have much of a chance, particularly when it comes to Wall Street. There just isn't an aggregation of interests that has been able to match the really focused, concentrated efforts by Wall Street to lobby and influence really both political parties.
Give me a sketch of income inequality and where we stand today.
The level of income inequality is at a level higher than it's been any time in the recent past. You'd have to go back before the Great Depression.
You see the problem in every part of our income distribution. The top 1 percent garners for itself around 20 percent, one-fifth of all the income of our country. Some years it's even more, 23 percent.
The top one-tenth of 1 percent garners for itself a very large fraction of the on what goes to the top 1 percent. The top 1 percent of wealth holders have somewhere around 40 percent of all the wealth in the United States. The recession made all these things worse.
The average American, most of his wealth was in housing. Housing prices went down, and they lost a lot of what they got. Yes, the people at the top saw the stock market go down, and for a moment things weren't so good, but then it largely recovered.
Government policies were very active trying to recover the stock market. Very ineffective in getting the housing market to recover.
So the 1 percent got their money back.
And the rest of the country suffered. ... We have a middle class that's being eviscerated. Middle class jobs are disappearing. Jobs that used to be very good, like autoworkers, have seen their wages gone down by half, two-thirds. The numbers of people that are within 50 percent of the median, the person right in the middle, that number has gotten smaller. There are more people at the extremes. ...
Why do you think no one, in the end, no bankers ever went to jail for this?
Well, I hope it is not the end of the story. Let me be clear: We don't want revenge. We don't want hangman justice in this country. But if wrongs were committed, they need to be righted. If people broke the law, they need to be fully investigated and prosecuted, and if they are found guilty, appropriately sentenced or punished for that behavior. And it is the question I get most often from people: Why is it that no one has paid the price? Because I think what is striking to people is there seems to be no correlation between those who drove the crisis and who has paid the price.
And think about it for a minute. Here we are, some three years after the meltdown, and what do we see? We see in 2011 that banks had record profits. The 10 biggest banks in this country now control 77 percent of the banking assets of this country -- bigger, fewer banks. The 10 biggest banks had $62 billion in profits. And we see Wall Street compensation in 2010 rising to record levels, $135 billion of publicly traded Wall Street firms.
Meanwhile, 24 million people out of work can't find full-time work, have stopped looking for work. Nine trillion dollars in wealth of American families wiped away, like a day trade gone bad. Four million folks have lost their homes to foreclosure, and estimates are it is going to rise to 8 to 13 million people before this is over, families out of their homes. And I think there is a great sense of injustice.
And then we see a whole set of civil suits that are settled for pennies on the dollar and generally with no admission of wrongdoing. It's very much akin to someone who robbed a 7-Eleven for $1,000 being settled for $25 with no admission of wrongdoing. If that happens, you know they are going to be back at it. So we do want justice. We want people to know that there's one justice system in this country, not two.
And we want to make sure we have deterrents. And I think the most disturbing aspects of what's happened in the wake of this crisis is no real prosecutions, no real deterrents, no real payments of penalties. Take, for example, the instance of Citigroup, which was charged by the SEC [U.S. Securities and Exchange Commission] for misleading the investing public about its exposure to subprime lending. They claimed all the way through 2007 that their exposure to subprime loans, to the subprime market was about $13 billion, and in fact, it was $55 billion.
At the end of the day, the CFO, the chief financial officer, who made $7 million that year, was fined $100,000. The deputy CFO who made $3 million was fined $75,000. And the company paid a fine of $75 million, but of course that's paid by the shareholders. And time and again we've seen the lack of aggressive investigation and prosecution. Now, my hope is that the wheels of justice turn slow and that there is still vigorous pursuit of the cases, both that we referred and that have been referred to others.
But time will tell. I'm still of the hope and belief that we'll see some justice in the wake of this crisis, but to date, not yet.
What is the worst possible consequence? What’s the worst case scenario?
I just want to say, in many respects, the financial crisis never ended. It never ended. People seem to think about this financial crisis as one in which there was a run up to September, 2008, a bailout, and then the crisis passed. But, in fact, those clouds are still hanging over the global economy. And they're still filled with risk.
This crisis really never ended. There was a period of reckless lending, securities activity that extended over a number of years. And the overhang of that is still there. And it still hasn’t washed out of the system completely. Now, up until now, who has been asked to bear the brunt of that, have really been not the financial sector, but it’s been homeowners and workers. And, by the way, in the U.S. and in Europe. So you look at Europe, every effort [is] being made to protect the lenders, potentially driving countries like Greece and Spain into a depression. Here in the U.S. every effort [is] being made to protect lenders, at the same time that homeowners are drowning under a mountain of debt in this country. …
... Right now, we have people camping out all over the country proclaiming themselves the 99 percent. You're part of the 1 percent, clearly. Who should we be helping here?
I think the 99 percent need help, and I'll tell you what my biggest worry is now. ... Our educational system is failing the middle class and lower middle class and below people. The only way for people to close gaps and to, more importantly, bring the lower people up, is education. ...
We're moving into a world that's more and more complicated, more and more technologically oriented. Our kids are falling farther and farther behind. That's the real tragedy in what's going on in America. ...
Are you sympathetic with Occupy Wall Street?
I'm very sympathetic with the causes of it. I think it's extreme hyperbole to blame Wall Street for all the ills of the world, but I'm sympathetic with what caused it, which is they are in a warp that they can't really get out of very effectively. But I lay that at the feet of the educational system. ...
The Occupy Wall Street movement is a scream for fairness. What they see is a bonus system, high levels of compensation in the financial industry, and a financial collapse, and the epicenter of that was Wall Street.
I understand that they should be angry with parts of Wall Street, but I think the politicians have done a very clever job deflecting the share of the blame that should belong to them over to be just Wall Street. That's the part that I object to.
Also, if you look at the signs the Occupy Wall Street people are carrying, a lot of them say, "I need a job." That's what they really want, and that's what they deserve. But if you're not qualified to get a job because your school system has failed you, that's not a Wall Street creature. Wall Street didn't wreck the school system. ...
The anger out in the country is palpable, and it has been for a long time, with good reason. Did Obama's team assess it correctly? Did they handle it appropriately? Did they understand the anger that is out there about the financial situation?
Yeah, there's still a big question as to whether or not the big banks, the financial institutions that leveraged way beyond their means were taking these risks like never before were held accountable. There's still this perception that they came down to Congress, got the bailout and have gone about their way. And bottom line, Americans would like those entities to be held accountable for the decisions that they made, because they know that no one else would be able to go to Congress and get the bailout like they did.
"The FRONTLINE Interviews" tell the story of history in the making. Produced in collaboration with Duke University’s Rutherfurd Living History Program. Learn more...
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