 I want to welcome you to the 14th annual Philip Gamble Lecture, sponsored by the Department of Economics here at the University. The Gamble Lecture was established in memory of Philip Gamble, a professor of economics here from 1935 until 1971. It was established by Gamble's widow, Elizabeth Gamble Breed, and by Israel Ragosa, a student of Professor Gamble. So this afternoon I'm thrilled to have Gretchen Morgensen here as our Gamble Lecture. The title of her lecture is After the Day Luge, a look at Washington Wall Street and Main Street Post Meltdown. In short, because of Gretchen Morgensen, a very opaque, dark, and I would say sometimes sinister, corner of our economy has become much more transparent. And I think we all owe her a great debt for that. So as you can see, I'm just tickled pink to have Gretchen Morgensen with us today. You know, it's interesting to be looking back on the events of 2008 from two years and still be trying to fathom what went on and what hit us and who the perpetrators are. But I think we are still very much in the midst of learning about this crisis, how it came about, how it was perpetrated, and how we can perhaps prevent it from ever happening again. I sometimes feel not that I am writing journalism, but that I am an archaeologist who picks up little tiny pieces of, you know, dust and crusted information, brushes it off, and then tries to fit it into the puzzle of whatever it is that we're trying to explain. And in this case it was a very complex sequence of events that really almost blew up the economy. So looking back to those dire events of 2008, the fall of 2008, it just almost seems impossible to believe that two years have gone by. I will never forget the Lehman weekend, one of the oldest names on Wall Street going bankrupt. It was unthinkable. The Tuesday night that followed when AIG, the world's largest insurance company, was rescued by the government. The weekend that the Treasury decided to take over Fannie Mae and Freddie Mac, two of the largest financial institutions on the planet that were about to implode. It was a stunning and really bewildering time for everyone, but for those of us in the business press who are trying to make sense of what was happening, I felt like it was really surreal. I remember sitting at my desk watching the stock market plunge on my Bloomberg machine, all the while knowing that in markets that were more opaque, less visible, there were even worse, more harrowing things going on. These would be the credit default swap markets, the mortgage markets. I am so glad that that terrifying period is behind us, or is it? Two years after the deluge, after the events that we broadly call the panic of 2008 or the credit crisis, most of the nation remains very much in its throes. Not everyone, mind you, inhabitants of some quarters, such as Wall Street and the banks, are thriving. And the stock market, which stands around 11,000, if you're looking at the Dow Jones, represents a rare bright spot on our financial horizon. Corporate earnings too are expected to increase 45% in 2010 over last year. But the fact that the debacle and the aftermath continue to affect so many people is undeniable. Unemployment remains stubbornly high. Consumer debt levels are still in the stratosphere. Household wealth, meanwhile, has plummeted largely as a result of crumbling home prices. Consumer confidence is low, and consumer spending, which accounts for two-thirds of gross domestic product, is marble. While the government tells us that the Great Recession ended in June 2009, for many people this statistic is at odds with what they see and feel every day. The fact is a prolonged period of economic pain is a new and disturbing experience for many Americans who have grown accustomed in recent years to financial crises that pass relatively quickly. Think about it. Over the past 25 years, Americans have learned that the typical financial storm blows in and then out fairly fast, leaving behind some but not massive amounts of damage. Since the mid-1980s, that's been our experience. The stock market crash of 1987, for example, when the major stock indices lost one-fifth of their value in one day. That was a certifiably awful event. But share prices recovered a lot of their losses within days, and by the time two years had passed where we are today, stocks were back at pre-crash levels. The savings and loan failures of the late 1980s were another example of a relatively contained crisis. While it is true that a thousand banks collapsed during this period and that these troubles contributed to a nationwide recession a few years later, the mess subsided without disastrous consequences. Ditto for the 1998 collapse of long-term capital management, the giant hedge fund, and the bursting of the internet stock bubble in 2000. Investors absorbed big losses, but they were by no means crippling. Now, no one welcomed these incidents or enjoyed them as they were occurring. But because their effects were relatively muted, these financial disturbances left many Americans singularly unprepared for the deep and lasting turmoil we are currently in. Even if you accept the recent report from the National Bureau of Economic Research that the recession ended last in June of 2009, that would make the duration of this downturn 18 months, the second longest after the Great Depression. Previous contractions in the post-World War II era lasted an average of 10 months. The Great Depression, 43 months. But 24 months after the disastrous autumn of 2008, why aren't we experiencing a stronger economy? I think it's because we are in the midst of a protracted, enormous, and excruciating, deleveraging process. We are purging the debt that we amassed during the credit binge of the early 2000s. And that process will take much longer than many may have thought because the size of the asset bubble and the debt that funded it was so unbelievably huge. Because ours was a crisis built on debt and massive amounts of it, its after effects will be felt for a long time. Debt is a wonderful thing when prices are rising because it can amplify an investor's gains. But when losses result, debt works to magnify them. That's because while asset prices fall, the amount of debt used to buy these assets stays at the same level until it is paid down or written off. This is one of the hardest lessons an investor has to learn. The assets might shrink, but the debt doesn't. And so you have legions of homeowners across the country carrying mortgages that exceed the value of the property underlying them by a considerable amount. According to CoreLogic, a research firm, 23% of borrowers nationwide are underwater on their mortgages. Massachusetts has almost 19% of borrowers upside down on their mortgages. But in the state of Nevada, 71% of mortgages have a value greater than the properties that underlie them. Half of the borrowers in Florida are in this position. The assets shrink, but the debt doesn't. At the end of the first quarter, American households owed a total of $13.5 trillion to their lenders, representing 120% of their after-tax incomes. At the peak of the bubble in the second half of 2007, household debt stood at 130% of disposable income, more than twice the level seen one generation earlier. And that, at the time, was a record. Most of this $13.5 trillion is mortgage debt, which stands at $10 trillion. Now to get it back to a more manageable level, economists at Goldman Sachs believe that figure will have to decline by at least $3 trillion. Much of the decline, as much as $2 trillion, will consist of subprime loans, which probably should not have been made in the first place. One reason why this deleveraging will take so much longer than usual is that the leveraging went so much further than it ever had before. Throughout the late 90s and into the 2000s, personal incomes were stagnant. But costs of health care, college education, and real estate were rising. So consumers withdrew money from their homes to cover the difference between income and outflow. They did this through home equity loans and second liens offered by easy money lenders. The amounts of this indebtedness taken on as property prices were soaring was just plain staggering. In 2005 alone, homeowners extracted three quarters of a trillion dollars from their homes, spending two thirds of it on personal consumption, home improvements, and paying down credit card debt. During the three years of 05, 06, and 07, borrowers were extracting between $600 billion and $800 billion a year from their homes. While the real estate bubble was expanding, these debts were secured by properties whose prices were rocketing. Now these borrowings are unsecured because the real estate assets beneath them have plunged in value. While mortgages are by far the largest debt held by consumers, our credit card obligations, car loans, and the like are also considerable. Today these debts stand at $2.4 trillion. To return to a sustainable level, they would have to decline by as much as 20%. Overall, for debt levels to become more manageable, economists say that debt should be about 80% of disposable income, down from 120% now. For almost four decades beginning in the early 1960s and extending through the mid-90s, the debt to disposable income level had remained in a range of between 58% on the low side and 85% on the high side. So you can see how wild and woolly this debt accumulation got in recent years. And you can also see why consumer spending is now in the doldrums. Many people are wisely using any extra money they generate now to pay down their borrowings, to cut up their high-cost credit cards and kick the debt habit. The number of open credit card accounts was down 23% recently from the highs reached during the second quarter of 2008, according to the Federal Reserve. Still, this deleveraging process cannot happen overnight. And economists say that if the recent pare down of debt continues and if household incomes grow modestly, it might be eight years before we return to equilibrium. A McKinsey Global Institute study of past deleveraging episodes showed that the typical downshift during the aftermath lasts six to seven years. We've lived through two painful years already. If these estimates are correct, we've got about five or six years to go. In the meantime, Americans are in a world of hurt. Halfway through the year, 11.4% of outstanding consumer debt was delinquent, totaling $1.3 trillion. Almost one trillion of that is seriously delinquent, meaning at least 90 days late. A half a million people had a foreclosure added to their credit reports between March 31 and June 30, an increase of 8.7% over the first quarter of the year. And the numbers of consumers with new bankruptcies appearing on their credit reports rose 34% during the quarter to 621,000. That increase is significantly larger than it has been in the last few years, according to the Fed. The recent census figures also indicate the misery out there. In 2009, there were 44 million Americans living in poverty, more than have ever been recorded in the 51 years these statistics have been collected. Our nation's poverty rate stands at 14.3% of the population. Saddest of all, children are the fastest growing impoverished group, increasing 8.7% last year, over 2008. Putting some of this in perspective, poverty has increased faster during this recession than it did during the brutal economic downturn of 1973. The census also shows that workers' wages have stagnated or fallen over the past decade. Median household income was $49,777 in 2009, roughly static from a year earlier, but down 5% from the peak in household income in 1999. Incomes aren't the only things that are falling. The Federal Reserve Board recently reported that the wealth of U.S. households declined by 2.8% in the second quarter of 2010. Household net worth, which consists of stocks, bonds, real estate and other assets, minus mortgages and other debts, stood at $53.5 trillion. Is it any wonder that consumers are worried? Confidence among consumers, which drives 70% of our nation's GDP, fell unexpectedly in September to $48.5 from $53.2 in August. This is all pretty downbeat stuff, I acknowledge. But I also know that Americans are an ingenious, indomitable and hardworking people. And we have what it takes to climb out of this massive hole that we've dug ourselves into. It's just that it's going to be a long and difficult slog. Our days of instant gratification are over. This is not a bad thing, in my view. The concept of shopping till you drop using borrowed money was never a sustainable one. Loading oneself with debt is a type of enslavement, after all. And understanding the implications of this is crucial for a healthy society. I, for one, am hopeful that a lesson learned in this crisis is that less can be more for many consumers. But while consumers may be learning hard lessons in this crisis, many in positions of power on Wall Street and Washington are not. While Main Street suffers, Wall Street and Washington thrive. This disparity, a scenario where pain is not shared by all of those involved in a problem, is deeply disturbing to many in America. I know because I receive searing, angry, or just plain bewildered email messages from readers across the country. Why, they ask, are banks being allowed to force troubled borrowers from their homes without proving that they have the right to do so under the law? Why are the regulators in Washington the same folks who failed so utterly in their duties to rein in the reckless lending that almost blew up the economy? Why are they now being rewarded with even more responsibility? Why are some of the very people who were on the scene of this particular crime in positions of even greater power now? Others wonder why no government agency or law enforcement group has tried to recover some of the many millions of dollars in compensation given to the heads of companies that later failed or required bailout money. And the most common question of all, why has no one involved in this crisis gone to jail? Now you have a little taste of what fills up my email box daily. And even more distressing than these questions is the fact that I have no satisfactory answers to them. Yes, the massive 2008 is over, and yes, the Great Recession may have ended too, but we are still in a very perilous place, even as the crisis recedes. And that is because people understand more clearly than ever that there are two sets of rules in America. One set, which the citizenry receives, can be described as tough love. If you borrow to buy a home that went down in value and that you can no longer afford, perhaps because you've lost your job, that's your problem. Get over it. But for the institutions that created our woes, there's a kinder and more forgiving set of rules. If they took on too much risk during the mortgage mania, they get a taxpayer bailout. Their problems are everyone's problems. Let's throw money at them to avoid systemic risk. I'd like to read you an email I recently received in response to a column I wrote about how the recent Dodd-Frank law actually increases the potential for government backstops of big institutions in the future. Ms. Moriosa, don't you think it interesting that the self-proclaimed geniuses of Wall Street need a backstop because their hedges don't work? Don't you think it interesting that they use the government to make us provide that backstop? Isn't it interesting that they say we, the people, don't need the backstop of Medicare or that evil, evil social security? What this reader is getting at is the heart of the problem our country faces today. The dueling rules I mentioned a minute ago that have created a mass sense of mistrust in government and in business leaders. Americans are rightfully outraged that those who created the crisis, both on Wall Street and in Washington, continue to get taxpayer help or take no responsibility for the mess. Shame and a sense of shared sacrifice seems simply to have gone missing among many of America's leaders. Even as the government has thrown trillions of dollars into the system to mitigate the impact of the downturn, millions of people have been forced from their homes and trust in the nation's regulators and in some of our largest and most venerable institutions have been shattered. The problem of distrust, I think, is a huge one and it can be seen in recent poll numbers published by the Associated Press and CNBC. After polling 1,035 investors, the analysis showed a majority, 55%, said they believe the market and Wall Street is not a level playing field. The perception that the market is fair to only some investors is pervasive. Nearly 90% of small investors, those with portfolios below $50,000, said the market is biased against them and more than 75% of investors worth at least $250,000, said Wall Street is unfair to the little guy. This is deeply troubling because small investors have been big participants in the market over the past generation and losing that participation will have consequences. Not only will it be harder for companies to raise capital and create jobs, a prevailing view of unfairness also means investors will have fewer choices when they deploy their investment dollars and plan for retirement. As for restoring faith in government, well, this is job one according to the poll. It found mass mistrust in regulators' ability to police the financial system. Only 8% of those interviewed said they had strong confidence in financial regulators. Half of those polled expressed little or no confidence, including 16% of the latter, zero confidence. This is no surprise given that almost every one of the nation's financial regulators fell asleep on the job in the years leading up to the disaster. This included the folks at the Securities and Exchange Commission, the Office of Thrift Supervision, the Comptroller of the Currency, Housing and Urban Development, and the Fed. About the only group that does not appear to have been snoozing throughout was the FDIC. Now that the taxpayers are on the hook for hundreds of billions of dollars in bailouts, I think it's high time to examine what is considered business as usual at the highest reaches of some American companies. From my perch at the New York Times, I see a disturbing sense of entitlement among some business leaders today that lets them justify siphoning off massive wealth from their shareholders even when their performance is mediocre or downright disastrous. And the way some of these companies treat their customers and their workers is equally troubling. There are some who say that this crisis proves that capitalism doesn't work. I'm not sure that this is right. Capitalism still may work, but it has to be protected from the sorts of capitalists who will take everything for themselves, leaving nothing for the rest of us. These are the people who weep all of the gains when they are taking on massive risks but then force the taxpayer to shoulder the losses when they inevitably arise. The men at the top of Citigroup, Merrill Lynch, Washington Mutual, Bear Sternes. This is not the way capitalism is supposed to work. Privatizing gains and socializing losses is deeply unfair, thoroughly un-American, I thought. But that is precisely what has characterized the aftermath of the credit craze. I am a believer in the free markets, but I also believe that because I believe that it is crucial for entrepreneurs to be able to raise capital and create jobs and allow investors too to share in the wealth that's created under a capitalist system. There's no country on earth that does this better than America. But it is because of these beliefs that I have grown so distressed in recent years as people in high places have abused the system. It's an unfortunate truth that a few bad apples can spoil the entire barrel. Populist capitalism, like ours, can be hugely beneficial to a vast majority of people. But an ethical tradition is needed to make it all work. When you have senior executives walking away with hundreds of millions of dollars leaving shareholders and innocent taxpayers in the dirt, it becomes extremely dangerous. And as more and more jobs disappear from this country, the outsized pay amassed by corporate executives becomes even more polarizing. Here's an annoying fact. Did you know that the American taxpayer is still footing the legal bills amassed by the former top executives of Fannie Mae, the mortgage finance giant? They are defending themselves against shareholder lawsuits pertaining to their phony accounting that arose in 2005. Now, these bills are small in the grand scheme of things, I admit. Maybe millions of dollars, certainly not billions. But the mere fact that they are our responsibility is beyond exasperating. The trouble today is that some in corporate America, together with their co-conspirators on Wall Street, have rigged the game so that executives can get immensely rich at the expense of their shareholders and often to the detriment of their workers. Think for a moment about the hundreds of billions in losses taken by some of our largest and formerly respected financial institutions. Some of the executives who ran these companies into the ground, none of these executives, sorry, who ran these companies into the ground, have been forced to give back compensation that they earned when the losing positions were put on the books. Yes, some of them lost money when their stock prices collapsed as their companies cratered, but so many executives had earned so much over the prior years that such losses are only a fraction of their total compensation. As these people skate away from the scene, they send the rest of us a clear message. It's a dangerous one. Accountability is a wall if you reach the highest levels of corporate America. You can collect all the gains when the party is on, but when the hangover comes, the losses are somebody else's responsibility, either your shareholders or the taxpayers or both. It is dispiriting that leaders would behave this way. After all, leaders are supposed to be exemplars, people we can look up to, and yet what many have done is simply run away, disclaiming responsibility, conduct unbecoming a leader of any kind. These practices also have consequences, and I think we see them most clearly in the anger that is evident among Americans today. Trust is hard won but easily lost, and a great deal of it has been squandered in the recent failures and bailouts. I'm not only talking about trust in private institutions like banks and other corporations, but also about our government. The credit crisis was a two-pronged failure after all. First was the failure by the private sector to rein itself in or limit itself to appropriate business practices. The profits from reckless activities were simply too tantalizing to pass up for many of the executives running these institutions. The take the money and run mentality ran amuck. Second, however, was the abysmal regulatory performance, while Citigroup, for example, was amassing its mountain of toxic assets. Regulators of the New York Fed, overseen by Timothy Geithner, were loosening the reins on the company. And the failure by people at the highest levels of our regulatory system to understand the risky practices being pursued by some of the nation's largest banks was nothing short of breathtaking. This inability to recognize peril when it was staring them in the face meant that Ben Bernanke and his colleagues were far behind when the subprime crisis began to metastasize. According to Mr. Bernanke's calendars and schedules, which we foy at at the New York Times, it was not until August 14, 2007 that the Chairman of the Federal Reserve gathered his staff for a meeting to discuss subprime mortgages. Former Treasury Secretary Henry Paulson's schedules indicate that the first discussion of the subprime problem in his office occurred on September 6, 2007. If these were indeed the first in-depth discussions about subprime, then the heads of both the Fed and the Treasury were playing a serious game of catch-up when problems in this arena erupted several months later. The question that I believe remains to be answered, and it will have to be tackled by ethicists and others far better qualified than I, is why was greed allowed to go so viral during this period? I think part of an explanation lies in a rejection by some business leaders of a powerful social compact, a duty to others rather than just to self, that had been embraced by many people in positions of power. Recognizing that they had immense sway over investors, workers, and customers, these people agreed to hold themselves to a higher standard of care. It was an unwritten rule, perhaps, but it did seem to guide many people for quite a long time. Now it seems to have been supplanted by the notion that personal profits are supreme and that making it to the top means having the biggest bank account. I don't know exactly how we recover an attention to duty and care for others in the business world. I don't know how to force people in high places to forego profits for propriety. I know that those of us in the media can do our part by shining light on the dark corners where such behavior often flourishes. But I've also concluded that Americans know how to write themselves when they recognize that they are headed down the wrong path. Such a shift can begin when we hold our leaders accountable and when we, as consumers and investors, protect ourselves from harm by saying no to dubious practices. By dealing whenever we can with companies that are worthy of our trust, we can help ensure that such enterprises succeed. There are plenty of these kinds of operations, large and small, across America. And given that Washington seems pretty dysfunctional and Wall Street remains a scary place indeed, it seems increasingly obvious to me that the folks on Main Street are the only ones who can pull us out of this mess. Faced with so many woeful stories of the people harmed in the Great Recession, I concede that it's hard to be optimistic about our future and what kind of a country we are leading to our children. But America as the land of opportunity, accountability and honesty has not vanished altogether. I prefer to think it has been only temporarily subverted. Yes, it has taken some very damaging body blows, but the traits that made this country great, hard work, selflessness, honor, are still very much in us. We have just lived through a period when they weren't rewarded. To regain confidence after enduring this mess, I believe that at least some of the people who blew up these institutions must be held accountable for their actions. Investors, pensioners, employees and taxpayers all have been hurt by reckless risk-taking at the very highest levels. It will be criminal if the people who created this disaster and profited mightily from it are allowed to slink off into the night. Then we will have confirmed the suspicion that the paths of the powerful are protected, but that the little guy must fend for himself. And that, I hope and I pray, is not the new American way. Thank you very much for your attention. I have a few questions and answers and references that she would call on you. So I'll just sit here for a while. So I'll call on you and then I can repeat the question so everyone can hear. Yes, sir. It seems to me that the law is for a whole generation to ruin the concept, either of the electric officials or the employees for the government. That's part of the problem. These issues too, this is not financial. We're just a whole oil in the Gulf where inspectors enter the jungle. And recently, with the story of the road, yesterday with the warriors who died here in our industry, what they covered is the fraud. I think the other half of it is how government employees were reviewing and approving fictitious doctors, fictitious exams, fictitious everything and paid out 40 million, apparently, to doctors who are just an example of a ultrasound pregnancy test for a mere doctor, either with no patient, no doctor, no exam. It seems that this is the failure of government to concept of e-regulation. Who is doing the regulating because you just need to do this over and over again of all levels of government. Did everyone hear the comment and question? No? Okay, I'm going to try to synthesize it. Essentially asking the question of why regulation in a wide array of areas has failed. We have seen problems in the financial system, those regulators, the oil inspectors in the Gulf, for example, the Medicare fraud that just emerged yesterday. The question essentially is why are these events or crises or scandals continuing to repeat themselves over and over again? I guess my answer to that would be twofold. I think there are two different kinds of regulatory failure in that list that you went through. The Medicare fraud I would put in the incompetence category. I cannot explain how a person could, you know, send thousands of dollars, millions, whatever the number is, to things that were on their face, apparently fraudulent and would have been, you know, easily identified by maybe a six-year-old. That's hard to understand. It's hard to think that that is anything but just sheer incompetence. The other more troubling failure, I think, is the tendency for regulators to be captured by the industry that they are charged with overseeing. I think that we can absolutely say with certainty that the financial regulators were captured in the years leading up to the crisis. It's almost as though these people have, because they deal with the banks, they have the mindset of the banks. It's their world view, almost. My colleagues and I at the paper FOIA'd Tim Geithner's calendars for a two-year period before he became the Treasury Secretary when he was the president of the New York Fed. So it was a pilot document like this of his calendars every day and who he went to lunch with and who he had meetings with and who he had dinner with. And it was so skewed and so heavily bank-oriented and big deal bank-oriented and CEO bank-oriented. Lunch at the Four Seasons was common. He sat on a board, a charity organization run by Sandy Weil, the head of Citigroup. I mean, this man was not a regulator. This man was a bank CEO wannabe and that's his mindset. And so why am I surprised that Citigroup was allowed to, you know, amass hundreds of billions of dollars of toxic waste on its balance sheet while Timothy Geithner was supposedly overseeing the bank? So capture regulatory capture is a huge problem and one that I think we've seen over the years as you point out. I don't know how you solve it but I think you certainly don't solve it by giving the people who are captured bigger, more powerful jobs. Yes, sir. Okay, so the question is, we seem to have been too trusting in the years leading up to the crisis of the powers that be and now we are talking about a lack of trust taking over and sort of how are we to be able to, you know, not have this problem in the future, what the media can do to help prevent this kind of swing between, you know, greed and fear is what the, you know, investors will tell you are the, you know, polar opposites. I think that as far as the trust is concerned, I mean it was investors, you know, have a lot of responsibility or should take responsibility for a great deal of the losses that were encouraged and I mean institutional investors because they did not do their homework. They did not really delve into what these securities were, these mortgage securities, these complex, collateralized debt obligations which were made up of pools of, pools of mortgages, thousands of loans. Nobody really could plumb these things or understand what they were. They were relying on the ratings agencies to do their homework for them and so, yes, there was an excess of trust in institutions, not just regulators, but Wall Street banks, ratings agencies, all these sort of cast of characters that were really supporting the view that everything was fine, real estate prices never go down, that the valuations were appropriate for these assets and so it was a group think in a really powerfully bad way. That's hard to overcome. That's human nature. People love a bull market. People think they're brilliant. They think that they're responsible for making the right calls when the stock market's going up or whatever market it is. I mean, you couldn't go to a party in New York or anywhere for that matter without hearing about real estate prices and everyone was euphoric with the, you know, vast increases that were going on during the early 2000s. Everyone was very happy about that. So it's a group think, it's an inability to question or a lack of will to question the conventional wisdom that I think is very, very problematic and that leads me into the media answer because the media I think was part of the unindicted co-conspirators in this group because I think that we could have been a lot more skeptical and questioning and tougher but my business is in disarray to say the least and it's shrinking and there are far fewer news organizations than there used to be and so it's a very difficult dynamic for people who do want the media to do the job of speaking truth to power because you have far fewer people like me out there who are willing to do that. So investors are kind of on their own, people are going to kind of be on their own and that's I think deeply unfortunate. Yes, sir? So with the stagnation of the kind of household income when you look at education and health care and that's been going on for such a long, long time how can we possibly look that we might get through this in six or eight years as you're suggesting and we're hopeful you would be in terms of the power of mainstream but there's this disparity between the wealth and the lack of investment in the common good and the decline of the household income how can we turn this around in six or eight years? The question is given the stagnating incomes given the disparity between the gulf, the widening gulf between rich and poor in this country how are we going to turn this situation around? I don't have the answer and if I did I don't think I'd probably be working at the Neera Times as a wage slave. I wish I had the answer I mean I think this is what thinking, you know, articulate, hopeful, optimistic you know, believers want to know the answer to and I don't know what the answer is but I do know what it isn't and it isn't to allow these big institutions to get bigger to allow them to be even more powerful than they were because we know how that we saw that movie we know how it ends and if they're getting bigger and if there are more of them and they are, they have certainly been taught extremely well in this incident whatever you want to call it, crisis that they will be bailed out there is no doubt in any one of them, their minds that they will be bailed out if they're big enough so we've sent that message that message has been delivered so you can't stuff that back into the toothpaste tube so my wish list for, you know the Dodd-Frank bill would have been law would have been to cut these institutions down to size to make them less perilous for the rest of us if they're too big to fail they're too big to succeed perhaps but nobody wanted to do that nobody had the will to do that they're very powerful these entities, these institutions so I'm afraid I'm going to dodge that question like a politician but I wish I had the answer I just don't in the back in the middle you, yep, you you said that accountability and do you believe that we have to increase the last decade? Question is, has greed increased in the last decade? You know, this is one of those questions that I think somebody if they could really do a persuasive argument or amount of persuasive argument it would be really a best-selling book because I get this question all the time I ask it myself all the time I never know if what I'm perceiving as a quote, increase in greed is just some sort of, you know nostalgic look backward at a time that didn't really ever exist human nature is human nature greed is a part of human nature so that suggests to me that it isn't more of a, it isn't a bigger part of human nature than it was before but I do believe that we are in a place where it is rewarded in a way that it might not have been rewarded before think about it for a minute you know, in the old days if you were, I mean old days I don't know 60s maybe, 50s even if you were accused or if you were caught doing some crime or a corporate guy I think you might have been thrown out of your country club I don't think you'd be thrown out of your country club today it's almost like there's a sense of acceptability about it if you're wealthy enough and I think that's kind of permeated so it's not necessarily that the symptom has grown larger but that the acceptance of it in society among very high ranking powerful people has grown what is acceptable behavior you know has changed and it's become more acceptable you know to get paid if you're a CEO at a level that's 500 times the average worker salary in your company which is far greater than it is anywhere else in the world and far greater than it's been in this country so that would be my answer to that but I would welcome a sociological examination of this problem and an absolute answer to it yes sir but some survey that I read unfortunately I don't remember the actions of the place I read it something like 96 or 97% of American property grazers were asked to inflate the values of property inspectors who were coldly made of American grazers now yeah that's a suit that's even all flagged it's an astonishing number and I'll also give a supplement just to know but there's some of these examples but the property is actually going probably steeped in November of 2006 but Washington Mutual has accelerated its self-prime lending after that point in 1907 and even in the early 20th century on the Shabbat is there any reason it seems too fast other than fraud? Does this agree that this is actually including a new organization? the question is he cites two data points to illustrate fraud and the pervasiveness of fraud in the real estate market one was that appraisers 87% in a survey 97% were said to have been asked to inflate a property property's price and you asked the question of how WAMU could have been so profligate with its lending even after the market peaked in 2000 the real estate market peaked in 2007 I think that people are used to a certain standard of living or pay or level of profitability whatever your measurement is and when it's threatened they start to panic and run faster to try to keep the game going Chuck Prince was the one who made the infamous comment about as long as they're playing the music I'm dancing and we're still dancing and this was city group where who just should have been a wallflower at that particular dance instead instead of the taxpayer now bailed them out I think there's this mentality that no it's really not a problem it's really not a problem we double our efforts and we'll still be as profitable and I'll still make my big paycheck and we'll still be the most third ranked bank in America whatever the number is I mean this was something that I think was utterly predictable because and it was another regulatory failure which was that HUD changed its rules and I believe 1996 to allow appraisers to be hired by the bank that was going to be financing the property so that just opened it up for what you can perceive it to be which is a reason to do inflated appraisals the mortgage broker they were all sort of in it together instead of having an independent third party who would say hold on wait a minute this house isn't worth $350,000 yes sir taking on these bad assets from friends companies what you think the role is for them in the future the question was the question of moral hazard i.e. bailing out institutions that are too big to fail and the message that that sends which is that you should fail again so go ahead and be as reckless as you want the taxpayer come to your rescue and how big a role did the fed play in moral hazard in this go around well very big, huge big as all outdoors I think the fed was you know in so many ways a party to creating these institutions and their power you know the fed was extremely involved in loosening capital requirements of banks for instance the Basel Accord the fed was extremely involved in making sure the banks did not have to set aside increased amounts of capital they were basically watering down what they had to set aside as a cushion that was a bank centric decision on the part of the fed you know I would say my feeling would be that it was more about what the fed did in the years leading up to the crisis then what they did after the crisis occurred because then you have you're in a financial storm, you're in a tsunami somebody has to do something and you know the one thing you don't want to do is restrict money you have to throw money at the problem this is what they all decided to do so my beef with the fed is that all of the things that it did to loosen requirements to let the banks get bigger let them get more reckless leading up to the crisis was the more pernicious part of the scenario then the aftermath now they've blown up the balance sheet what is it 3 trillion almost the fed balance sheet you know I don't know how they're going to take that down they can't take it down right now they won't that far is leaving interest rates too low absolutely huge mistake Alan Greenspan drink in the Kool-Aid you know just should not have done that I'm going to call on a woman right there that's you yes I've been moving to the United States in 1988 and you know when I was elected I remember the most standable day in the stock that confessed about what's going to be the kinds of policies that were introduced by the United States so some of those things have a kind of mystical and broad and cultural feature and then some of them have a good kind of grand antique kind of greatness about them so given what you know what you think are the primary sites of regulatory intervention it could be politically pursued now okay so that was a very interesting question that I now have to put into five words ten words I guess the question is what do I see as a way to make the regulatory structure more effective going forward would that be a good characterization okay right well I would just say one point and that is that I think we have to take an entirely new look at the incentives that are given or not given to regulators to do a good job my feeling throughout the crisis and the years leading up to it was not that we didn't have enough regulations on the books we had plenty of regulations on the books about mortgages about high cost loans we had states that were going up against federal regulators on predatory loans there were laws on the books that were not enforced okay so that was part of the failure we have to make somehow we have to bring the same kinds of incentives that you and I work under to the regulatory regime in Washington it's just crazy that these people get rewarded with bigger jobs after they've failed doing the job that they were supposed to do I don't know how you do it but we've got to put in place some way to make sure that if they have failed they don't move on to some other very important or even slightly important job in Washington there seems to be this revolving door where people it doesn't matter how badly they perform they show up somewhere else at some other agency so I think this is a big huge issue and I don't think it's something you can easily solve just a commentary but if we could structure the incentives for regulators and not allow them to you know quickly go into the industries that they were regulating or come from them I think that would help there is still that revolving door but they just don't have the right incentives they have no incentives at the moment except to go get that big job on Wall Street at the end of the line yes the question is what besides not breaking up big institutions do I see as the major shortcomings of Dodd-Frank one is that it creates more too big to fail institutions in addition to not breaking them up it has enshrined additional new institutions that are too big to fail what I'm talking about are the clearinghouses for credit default swaps and derivatives they don't have an explicit backstop they now have an explicit ability to go to the Fed discount window and to receive money in exigent circumstances is what they call it when your hair is on fire and the world is coming to an end you give them money so A they created more institutions that are too big to fail and I think a broader bigger problem is that Dodd-Frank allowed left so much of the heavy lifting to the regulators to do the rule writing and I understand the mentality I understand the idea behind this is that they're more knowledgeable about what to do and how to do it properly but it gives the large financial institutions a second fight at the Apple to try to finagle, manipulate massage whatever word you want to use the outcome and so this is two times they can try to get their way and if they didn't get their way the first time they're going to try again so the regulators have to be extremely stalwart and we're just going to have to see how that plays out I'm not totally confident yes you've very eloquently described the role of certain practices in the financial sector that led to this crisis but you did mention in passing the big stagnation that occurred in recent time so the average household that constantly declining income I wonder if you would comment on the possibility that there's really nothing that could be done to change the financial sector that by itself could solve this problem and then recurrence after all since for several decades labor markets in the US and in other countries have worked to prevent workers wages or really rising very much you could argue that the kind of activities the financial sector engaged in are about the only way the economy could be gotten to grow stock market bubble, housing bubble maybe Alan Greenspan realized if they stopped these bubbles how is the economy going to grow because there wasn't enough demand from anybody else so perhaps to prevent this from happening again more needs could be changed than just changes in the financial sector what do you think of that did everyone hear that the comment basically was that it is not solely fixing the financial institutions or the financial landscape is certainly not enough more work must be done especially given the fact that wages are stagnant and that perhaps during the bubbles of the internet bubble in 2000 or the late 90s the housing bubble that was the only way to make the economy grow well I think I agree with you I think that there is a risk that Alan Greenspan really did perhaps believe that that was I feel like I know that he felt that it was important to throw money at the problem when the internet bubble burst and that's why he kept interest rates down at 1% for so long but it's just not a sustainable business model for this country and that's why I would agree wholeheartedly that we have to have a thorough examination of what we can do better in this country what we can do right and make it an effort that includes everyone and not just a tiny percentage of the population I mean the thing that I noticed throughout those years was how much of the earnings how much corporate earnings were dominated by the financial system and we all know why it was because it was they were inventing things that had huge margins because people didn't understand them they were ripping people's lungs out on mortgages it was all these sort of ugly things but it was extremely profitable well that's no way for us to grow and so I agree with you I think we need to have an entirely new way of thinking about how very inclusive about how many many more people can participate in the system than just a small little sliver that then maybe you hope trickles down to the rest yes that political will I assume you're talking about the administration and congress and business leaders why are they just out of the act well I think let's talk about government business leaders I don't know I think that you could maybe argue that they like it the way it is they got it pretty good they run to daddy if they have problems and daddy so let's talk about the government why isn't there more political will to stand up to the banks for instance to really cut them down to size create more of a total holistic whatever you want to call it economy at first I thought that well first of all congress is very involved in the problem very very very involved in creating the problem so that is why they are not jumping up and down and telling you about all the good things that they're going to do you know to save the world and to solve this crisis I think that they don't want you to pay too much attention to what they were doing along the way like supporting Fannie Mae and Freddie Mac when these were blowing up their balance sheets ballooning their balance sheets using the taxpayer subsidy to enrich themselves you know they had a huge support group in congress who if anybody looked cross-eyed at Fannie Mae they would be run out of town on a rail so I think congress you know understands that it has its own kind of guilt if they have a guilt you know the ability the capacity for guilt I don't know but you know as far as the administration is concerned you know initially I was disappointed with the selection of the financial team that Obama chose because I think that they were part of the creators of the mess but you know I sort of gave him a pass because I thought well he doesn't really it's not his area of expertise so he relied upon some of the old crew from Clinton's administration but now it's kind of too late to just say that it's somebody else's problem now he owns it and I really don't understand why he is not willing to be more you know take a sort of a stronger approach to the problem I think he's listening to Tim Geithner and I think that explains a good deal of it and so it's going to be again this bank centric mode I he made a mistake he should not have made him treasurer secretary he should have taken a break and just gotten somebody new maybe Paul Volcker would have been my pick but he's not new but I mean he was not a part of the problem but he did not do that so now he's sort of got tarnished with these people's participation in the mess but I would love to know the answer to it someday maybe Bob Woodward will write a book and we'll know yes I really the question is to what degree was were the decisions made in 2008 in the fall of 2008 bad choices because there was a lame duck in the White House I don't think that it really had that much of a role but I could be wrong I'm not a political reporter and I'm the first one to say that I'm not unhappily so you know I think that Hank Paulson really had the run of the place and I think that what he wanted to do he did so I don't really think it had much to do with Bush I think that it was his show he was running it and he was you know gonna basically do what he felt he needed to do and I think Bush was kind of along for the ride I think he was equally bewildered you know by the events but I don't really think it was I don't think it was in Hank Paulson's mind oh I can't really do this because he's a lame duck I think he was just you know doing what he felt he had to do you know and some of the choices were in hindsight not good ones but you know it's easy to be the Monday morning quarterback I but I am again not steeped in the ways of Washington so that I could be entirely wrong about that but the times that I met him I felt that he was a person who called the shots Paulson yes on the aisle You may have an item do you or your colleagues at the time have a good way of looking at the scenes that he was actually funding the current election you know the audience seems to be reaching out and we don't have to disclose the statements I mean that seems to be important because are there any any evidence that seems to be behind the question is you know with the election that's upon us and the recent Supreme Court decision allowing opening sort of the floodgates to money that's shrouded in secrecy being put into elections are we seeing anything at the paper that would indicate who's behind these ads or I am related the wrong person to ask about that but I do know that there are there's a team of reporters who are dedicated to this very issue who are really trying to run this down and they had a good story I'm trying to remember Monday's paper on the front page about a person I had never heard of before but you know one of these sort of behind the scenes guys and they were drawing the curtain back on him giving a lot of money to it was about ethanol it was someone involved with ethanol and so it was all about ethanol and promoting ethanol so I would look for the byline Don Van Natta the AN N-A-T-T-A stellar reporter I worked with him on the Hank Paulson stories in 2009 and he would be following this and following it very closely The question is how do these are things that are out there and evident some of these questionable securities arcane you know instruments that were created to obfuscate and sheer sheep whatever how do we go about telling that story you know I don't have an assistant I don't have a staff people call me up and say can you have your assistant ask me something I say I've been at the paper 12 years I'm still waiting to meet that person so you do it all yourself but you do it with a army of people on the street who are willing to help you they're not all willing to help you but there are people out there on Wall Street who are equally outraged at these practices and they will walk you through it and explain it to you in English you know and they can't write it and so you have to you know synthesize it and then put some clothing on it and make it something that the person doesn't just get a headache reading but you know I have so many people who are willing to help me anonymously yes but willing to explain the way the world works put me on to you should be talking to this person or that person you know and so I couldn't do it without them so there are people good people out there who want these stories to be told and then the process works this way once you feel confident that you understand it you have the documentation that you need one of the best things about being a business reporter is that it is mostly based on facts that have been registered with the SEC in financial filings it is not something that drops into my lap from a source who is eager to get you know back at someone or you know has some acts to grind these are usually things that you can ferret out if you're given the right direction so business reporting is far cleaner than political reporting because I don't have to be beholden to the people who give me these things as you would if you were a political reporter who is waiting for the leak of that classified document you have to wonder about why that person is giving it to you so then we go about verifying the information obviously calling the company for their side of the story what were they thinking when they created this instrument you know a lot of times they don't want to talk to me but you know at least I give them the right to do so I give them enough time to do so I have in my career stopped writing a story because I listened to the other side and I felt that I was on the wrong track so you do try to hear all sides of the story and then you try to put it into English and then you run the gauntlet of your editors and then God willing it runs in the paper or online so that's how it works in the very back thank you the question is do my editors ever tell me to try to ring me in or tell me not to go there no I'm trying to think if ever in my entire career at Forbes for ten years and I had a very explosive story that I was working on and it was really it was one where I had some I had some confidential sources who were telling me that a man who was very powerful and a big profitable unit at Bear Stearns was taking money under the table in exchange for clearing trades for fly by night brokerage firms so Bear Stearns was giving this giving these fly by night companies it's imprimatur so I was ready to go with the story the lawyers had signed off on it all the way up the Forbes smashed it had signed off on it and one of the sort of second tier editors stopped me in the hall and says you know you're going to get sued and I said well I don't really think so and you know the lawyers have signed off on it and I'm not really worried about it he said well I have a way to solve that problem for you I have a way to make sure I don't get sued and I said well what's that he said take out the part about how he takes money under the table I said uh huh no I'm not going to gut the story so I don't get sued so there are people out there who do that kind of preemptive I'm worried I'm afraid I can't go there I'm not going to run the story or I'm going to gut the story there are people out there I just try not to ever work for them yes the question is how has my job changed is it more challenging and difficult to get answers to questions to plumb these you know mystifying things entities securities etc it is more difficult trying to think why um you know one of the things that's definitely different is that it's been a study stream of scandal for the last 12 years and when I was at Forbes which was starting in the late 80s I actually was able to write about companies doing the right thing and I can't do I just I don't have time to do that anymore and that's kind of a sad thing because people think I'm just a nattering nabob of negative but um you know I just sort of feel like there are a lot of people out there who there are not enough people out there willing to kind of shine the light in these areas so that's part of my my deal and that's what I like to do but so yes it's changed it's kind of been a steady stream of scandal um again this I think goes to that question about greed and maybe that's a part of it that there is this grasping sense going on that you know people are really just going for the gusto the gold ring whatever it is and so pushing the envelope much more and so it just is becoming a steady stream of scandal but um my job is just significantly harder than it was because of the internet because um of emails the mountains of emails that I get and I welcome those because that's my relationship with my reader and that's important to me but the internet has also dropped down the barriers that you have with the public and so it's very difficult for me to answer all of those and I find that to be frustrating um it's extremely labor intensive I don't have a weekend anymore I'm working all the time I'm tied to my emails so it's it's just 24-7 now maybe that's because we're in a crisis period but I sort of think it's probably going to be that way from here on and yes uh you have certainly laid this down I think the political report but I'm still going to ask you a question because the wonderful thing about politics is we have a lot of opinions and a lot of knowledge well that would be me you've talked about all the crisis the credit crisis mortgage crisis corporate crisis that has manifested itself into a real political movement called the Tea Party in this country and it's likely we're going to end up with a whole new slew of political leaders do you mean they'd be getting the fact we've got one in this state right now are they going to make a problem better all these problems that you've identified or are they going to make it worse it's hard to know some of these this woman in Delaware is just wild I mean I sort of don't know how she could really help solve the financial crisis but you know maybe she could you know, stir the pot you know we're a big change and let's be open to all ideas so I don't have a predisposed idea about what they will bring to the party you know it's just very hard to generalize I think I think it's disappointing that that the Democrats haven't really realized how they can capitalize on this anger you know they have I think that's kind of a mystifying aspect of this Tea Party ascension that I don't understand because that is typically the populist anger is typically what a Democratic Party would be able to tap into and so the fact that they can't or haven't been able to is kind of kind of odd to me but it's hard for me to know what these people are going to contribute you know it does contribute this idea that kick the buns out you know which maybe brings a little bit of accountability to the scenario that didn't exist before so I'm for that you know I'm for the idea that maybe some of these people who are very entrenched might actually be a little bit concerned about losing their seats but it's hard to go beyond that note you know overall what they're going to contribute to the you know resolution of these problems I think we did it oh one more I have a few questions first of all you talked a lot about the fact that nobody responsible for these problems have been successfully prosecuted in fact I think they have been trying to prosecute a couple of Bear Stearns guys and they were let off who was responsible for the fact that nobody has been prosecuted who should be doing this are there a lot of prosecutions do you think in the pipeline that we're going to start hearing about so that's my first question who's responsible for that and what do we see coming down the pike and who should be doing it in the second no let me answer one forget it so the question is why are there not been any prosecutions and who should be doing them and so initially I sort of had this feeling that the amount of money that was lost the obvious dereliction of duty that went on the size of the problem the recession the length of the recession all of these things the unemployment all of these things point clearly to a very big problem a very big crisis why is no one being held accountable initially I thought that maybe it was because people in positions of power in washington felt that the economy and in fact the country was so fragile that we couldn't have prosecutions high profile prosecutions that let's get to the let's get over the chasm and then we'll start having them I don't know if that's true it felt kind of that way to me which I did not think was a way to do things but I don't know if that's the answer but that's one thing that did strike me during the 2008-2009 period that maybe people felt maybe somebody said to somebody at the doj let's just hold off on some of these prosecutions until we really get a little bit more of a solid grounding financially just mere speculation who should be bringing these cases well the department of justice first and foremost should be bringing these cases they are the ones to bring the criminal cases the SEC does not bring criminal cases they bring civil securities fraud cases and perhaps the biggest fish that they are going to try to fry goes on trial Tuesday in Los Angeles and that is Angelo Mozillo who was the CEO of Countrywide Financial he is being he is on trial with two of his colleagues for insider trading they contend the SEC contends that he knew that the company was going down the tubes and was selling hundreds of millions of dollars worth of stock without disclosing to the public that it was at peril he is probably the biggest name person that has yet to face a trial it's a jury trial it's a civil trial so this will not be a criminal case but I have I'm writing a story about this as what we call a curtain raiser for Sunday's paper and some of my legal sources tell me that if the SEC is successful in this case and they get the jury to find them find Angelo Mozillo liable then it is possible that the US attorney would come in and try to bring a criminal case your bar is lower you only have to find a preponderance of evidence whereas criminal is a far higher bar so it's not clear to me that he will be indicted but there is that possibility who knows the SEC may not even mount a successful case but it is going to be something that people are watching because it's one of the biggest name people out there I think state regulators could bring cases and they've been trying to bring cases but maybe there's just too much an embarrassment of riches that they can't you know mount these cases but it really starts at the DOJ and then works down SEC state AG's you're seeing state AG's start to get involved in the foreclosure problems now I think that they see a real good opportunity and the feds seem to be sort of standing behind not doing anything about that so those are some of the units there are groups that should be really very active and all along the DOJ had a mortgage fraud unit that was supposed to be really looking at mortgage fraud and they just have not brought many cases at all the SEC's case against Goldman Sachs was sort of a highlight and that was you know that I think people were surprised by because Goldman is so very powerful and politically connected so that would be I think the highest profile case again a civil case not a criminal case but yeah the cases have been few and far between question number two before we go we'd like to present you a couple of tokens of our greatest name first is this plaque in Massachusetts beautiful and the second is a frame copy of the poster and don't worry we will mail these to you so you don't have to carry them back and I want to thank the photographer Nicole Dunning for all the work that she did including this together and thank you Gretchen for a wonderful talk what about the second question do I get to ask? I'll ask you at dinner oh okay really? encore it'll be kind of anti-climactic after all oh it's your call here's the second question we talked a bit about the foreclosure crisis in fact the banks now are trying to foreclose on homes that they probably don't really own legally and I wanted to ask you what you think the Obama administration should do about this in particular should they support a moratorium on a nationwide moratorium on foreclosures and if if not what should they do to deal with this problem that we might have another grand theft to people who probably don't deserve it this is a really nettles some problem because it is it happens these foreclosures are one by one by one by one it's not an easily solved problem state laws are different from state to state I think that what I hope will happen is that the Obama administration will use this opportunity to sort of use this as a club or a stick to get some leverage with the banks to do the right thing on whether it's real genuine mortgage modifications that work not these phony tack on the arrears and interest on the back end a real principle right down low mod which is the only thing that works particularly when you have so many people upside down on their mortgages you know you'll have people screaming about moral hazard that this is another message sent to people that they can be reckless and irresponsible but you know my feeling is that well we've already sent that message to the big banks so why should the individuals be the ones that we now say nope sorry moral hazard is too big a problem here I don't like moral hazard any more than the next person but if you start to make the little guy pay and continue to let the institutions off the hook it again I think widens the divide between not only the rich and poor the haves and have nots but also the institutions and the individual and I think that's very dangerous so I think what they should do is use it obviously these were bad practices they flouted the law they should not be allowed to just dispense with the appropriate paperwork the rule of law still should exist in this country when little individual people are concerned so I would like the Obama administration to use this as a leverage tool to get some real action out of the banks whereas the mortgages are concerned so thank you very much thank you