Who Stole the American Dream? (66 page)
Read Who Stole the American Dream? Online
Authors: Hedrick Smith
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DO-IT-YOURSELF
1
Can you really afford to retire?
“Can You Afford to Retire?” PBS
Frontline
, May 16, 2006,
http://www.pbs.org
.
2
“A million people”
Teresa Ghilarducci, interview, December 22, 2010.
3
“Left to their own devices”
Eric Schurenberg, “The 401(k) Has Failed. Admit It,”
Huffington Post
, July 14, 2009.
4
“I would blow up”
Ted Benna, quoted in Jeremy Olshan, “ ‘Father’ of the 401(k)’s Tough Love,”
WSJ Smart Money
, November 22, 2011,
http://blogs.smartmoney.com
.
5
Like many arcane technical provisions
Excerpt of interview of David Wray, president, Profit Sharing/401(k) Council of America for the
Frontline
program “Can You Afford to Retire?,” February 17, 2006,
http://www.pbs.org/frontline
.
6
It was a classic Washington move
Excerpt of interview of Dallas Salisbury, EBRI president for the
Frontline
program “Can You Afford to Retire?,” December 1, 2005,
http://www.pbs.org/frontline
.
7
“The technology and methodology”
Excerpt of interview of Bob Reynolds, vice president of Fidelity Funds, for the
Frontline
program “Can You Afford to Retire?,”
http://www.pbs.org/frontline
.
8
“It had a lot of sex appeal”
Excerpt of interview of Brooks Hamilton for the
Frontline
program “Can You Afford to Retire?,” February 23, 2006,
http://www.pbs.org/frontline
.
9
401(k) plans grew from 7 million people
U.S. Department of Labor, “Private Pension Plan Bulletin Historical Tables and Graphs,” December 2011, table E20, “Number of 401(k) Plans, Total Participants, Active Participants, Assets, Contributions, and Benefits Payments, 1984–2009,”
http://www.dol.gov/ebsa/pdf/historicaltables.pdf
.
10
“There was a sea change”
Brooks Hamilton, interview, December 8, 2010.
11
Their secret was
Excerpt of interview of Brian Conner for the
Frontline
program “Can You Afford to Retire?,” February 26, 2006,
http://www.pbs.org/frontline
.
12
“If I had started earlier”
Excerpt of interview of Gil Thibeau for the
Frontline
program “Can You Afford to Retire?,” February 22, 2006,
http://www.pbs.org/frontline
.
13
When he retired
Gil Thibeau, interview, August 5, 2010.
14
“My assumption was”
Excerpt of interview of Winson and Bess Crabb for the
Frontline
program “Can You Afford to Retire?,” February 22, 2006,
http://www.pbs.org/frontline
.
15
“In every case, the 20 percent”
Brooks Hamilton, interview excerpt, from
Frontline
program “Can You Afford to Retire?”
16
“I label this [the] ‘yield disparity’ ”
Ibid.
17
The 401(k) track record
Jack VanDerhei, email, January 5, 2012.
18
The typical 401(k) nest egg
Ibid., January 12, 2012.
19
The Center for Retirement Research
Andrew Eschtruth, Center for Retirement Research at Boston College, email, October 31, 2011.
20
Seriously “at risk”
VanDerhei, interview, December 10, 2010. See also Jack VanDerhei, “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates,” EBRI Issue Brief No. 297, September 2006,
http://www.ebri.org
; and VanDerhei, “Evaluation of the Adequacy and Structure of U.S. Voluntary Retirement Plans, with Special Emphasis on 401(k) Plans,” Employee Benefits Research Institute,
Benefits Quarterly
(Third Quarter 2010).
21
More than half of American families
Alicia Munnell, interview, July 9, 2010; and Andrew Eschtruth, emails, January 23 and October 30, 2011. Economists and other experts at Boston College created the National Retirement Risk Index (NRRI) to measure the adequacy of retirement savings by individual households in their 401(k)’s, IRAs, Social Security, and other savings. The index compares the ability, at retirement age, of individuals and households to generate 70 percent of the final pre-retirement income, a target chosen because the financial industry estimates that is what is needed to maintain one’s standard of living after retirement. Munnell describes the NRRI as a conservative index, not intended to exaggerate the problem. It uses average life span expectations and average market returns on a balanced bond-stock retirement account. See Alicia Munnell, Anthony Webb, Francesca Golub-Sass, et al., “Long Term Care Costs and the National Retirement Risk Index,” Brief No. 9–7 (Chestnut Hill, MA: Center for Retirement Research at Boston College, March 2009); and Alicia Munnell, Anthony Webb, and Francesca Golub-Sass, “The National Retirement Risk Index: After the Crash,” Brief No. 9–22 (Chestnut Hill, MA: Center for Retirement Research at Boston College, October 2009).
22
“Not going to be penniless”
Munnell, interview, December 8, 2010.
23
Failure to sign up
Press release, “54th Annual Survey of Profit Sharing and 401(k) Plans,” Profit Sharing/401(k) Council of America, October 11, 2011,
http://www.psca.org
.
24
Low contributions
Anne Tergesen, “401(k) Law Suppresses Saving for Retirement,”
The Wall Street Journal
, July 7, 2011.
25
Only 10 percent
Ibid.; Eschtruth, email, January 23, 2011; see also Population
Reference Bureau, “U.S. Labor Force Trends,”
Population Bulletin
63, no. 2 (June 2008); Alicia Munnell, interview, February 6, 2006, transcript, “Can You Afford to Retire?,” PBS
Frontline
, May 16, 2006,
http://www.pbs.org
.
26
Many other people
Excerpt of interview of Alicia Munnell, interview for the
Frontline
program “Can You Afford to Retire?,” February 6, 2006,
http://www.pbs.org/frontline
.
27
“Everything! Everything has gone wrong …”
Ibid.
28
Plan holders lost an estimated $2.8 trillion
Eschtruth, email, November 7, 2011.
29
Many employers cut back, too
“In Need of Cash, More Companies Cut 401(k) Match,”
The New York Times
, December 21, 2008; David Kansas, “Has the 401(k) Failed?”
CNNMoney.com/Fortune
, June 16, 2009.
30
Overall, one in five
“Good News for 401(k) Plans, Just in Time for the Holidays,” Profit Sharing/401(k) Council of America, December 17, 2010,
http://www.psca.org
.
31
Corporate America was still pinching
“Retirement Plans Make Comeback, with Limits,”
The Wall Street Journal
, June 14, 2011.
32
People had totally unrealistic expectations
John Bogle, interview, December 12, 2010.
33
Cost investors $8 trillion
John Bogle, testimony, House Committee on Education and Labor, February 24, 2009,
http://johncbogle.com/wordpress/wp-content/uploads/2009/03/statement2009.pdf
; Hamilton, interview, December 8, 2010.
34
Don’t reap the full benefit
Ibid.
35
That is why Bogle
Ibid.
36
Most people are shocked
VanDerhei, email, July 20, 2010.
37
Sets slightly lower targets
Eschtruth, email, December 15, 2010.
38
“I got hit like everyone else”
Rich Kidner, interview, July 12, 2010.
39
“Where am I going to get”
Ibid.
40
But the experts at EBRI
Dallas Salisbury, interview excerpt from
Frontline
, “Can You Afford to Retire?,” November 9, 2005.
41
Put the figure higher
Brooks Hamilton, interview excerpt from
Frontline
, “Can You Afford to Retire?”
42
Add it all up
Andrea Coombes, “U.S. Retirement Income Deficit: $6.6 Trillion,”
WSJ MarketWatch
, September 15, 2010,
http://www.marketwatch.com
.
43
“That $6.6 trillion”
Anthony Webb, interview, January 20, 2011.
44
The corporate pension shortfall
The Pension Benefit Guaranty Corporation gave an estimate of $504 billion.
Pension Insurance Data Book 2009
14 (Summer 2010): table S-49,
http://www.pbgc.gov
.
45
City and state pension funds
Peter Whoriskey, “Economists: State, Local Pension Funds Understate Shortfall by $1.5 Trillion or More,”
The Washington Post
, March 3, 2011.
46
“Our nation’s system”
Bogle, interview, December 12, 2010.
47
“Now this monster”
Benna, in Olshan, “Father of the 401(k)’s Tough Love.”
48
Financial professionals
Thomas C. Scott, “The Risk-Averse Future,” in “Room for Debate,”
The New York Times
, online running commentary on the news, March 25, 2009,
http://www.nytimes.com/roomfordebate
.
49
401(k) system can be made to work
Press release, “54th Annual Survey of Profit Sharing and 401(k) Plans.”
50
Has become like a roulette wheel
Schurenberg, “The 401(k) Has Failed.”
51
Nearly three out of four
“Working in Retirement Is the New Normal for Middle Class Americans, Wells Fargo Retirement Survey Finds,” Business Wire, December 8, 2010,
http://www.businesswire.com
.
52
Older workers (fifty-five and up)
Maria Heidkamp, Nicole Corre, and Carl E. Van Horn, “The ‘New Unemployables,’ ” Issue Brief No. 25 (Chestnut Hill, MA: Sloan Center on Aging & Work at Boston College, November 2010).
53
Even among people seventy-five and up
Kelly Greene and Anne Tergesen, “More Elderly Find They Can’t Afford Not to Work,”
The Wall Street Journal
, January 21, 2012.
54
“Baby boomers will be facing”
Excerpt of interview of Teresa Ghilarducci, for the
Frontline
program “Can You Afford to Retire?,” February 17, 2006,
http://www.pbs.org/frontline
.
55
“It’s just not adequate”
Excerpt of interview of Anna Sullivan for the
Frontline
program “Can You Afford to Retire?,” February 13, 2006,
http://www.pbs.org/frontline
.
56
“This is a national problem”
Karen Friedman, interview, December 6, 2010.
57
“We need a new tier”
Munnell, interview, December 8, 2010.
58
Jack Bogle advocates
Bogle, testimony, February 24, 2009.
59
Participation by all employees
Teresa Ghilarducci, testimony, House Education and Labor Committee, October 7, 2008; Jacob F. Kirkegaard, “Stop Rewarding the Wealthy,” Peterson Institute for International Economics, in “Room for Debate,”
The New York Times
, online commentary, March 25, 2009,
http://www.nytimes.com/roomfordebate
.
1
“Right here in America”
President George W. Bush, remarks on home ownership, Atlanta, GA, June 17, 2002,
http://georgewbush-whitehouse.archives.gov
.
2
“I didn’t think I made enough money”
Eliseo Guardado, interview, October 3, 2010.
3
“The banks are playing to brokers”
Kathryn Keller, interview, August 9, 2010.
4
Even so, she got stung
Bre Heller, interview, August 4, 2010.
5
“I am a victim”
Bre Heller, email to Florida Attorney General’s Office, October 22, 2008.
6
Bre Heller figured her loan
Heller, interview, August 4, 2010.
7
Was deep “under water”
CoreLogic reported that 11.2 million homes, 24 percent of residential properties with mortgages, were in negative equity on March 31, 2010; CoreLogic, “Real Estate News and Trends: New Core-Logic Data Shows Decline in Negative Equity,” media alert, May 10, 2010,
www.corelogic.com/about-us/researchtrends/asset_upload_file155_1435.pdf
.
8
“Considering that I lost $250,000”
Heller, interview, August 4, 2010.
9
The irony in that episode
Robin Updike, “ ‘Friend of the Family’—Washington Mutual New TV Ads Focus on ‘The Little Guy,’ ”
Seattle Times
, September 3, 1991.
10
Killinger was warned in advance
Lee Lannoye, interviews, August 27, 2010, and September 27, 2010. Sen. Carl Levin, summarizing the investigation of Washington Mutual by the Senate Permanent Investigations Subcommittee, identified WaMu’s purchase of Long Beach Mortgage as the pivotal change in Washington Mutual’s loan strategy from prudent conventional lending to borrowers with solid credit records to high-risk subprime lending with the goal of profiting by selling those loans to Wall Street, leading to development of WaMu’s own high-risk, high-profit Option-ARM loans. As Levin put it, “WaMu built its conveyor belt of toxic mortgages to feed Wall Street’s appetite for mortgage-backed securities.” James Vanasek, former chief risk officer at Washington Mutual, testified that bank insiders had warned of the dangers of WaMu’s new high-risk loan strategy. According to Vanasek, “There is ample evidence in the record to substantiate the fact that it was clear that the high-risk profile of the entire industry, to include Washington Mutual, was recognized by some but ignored by many. Suffice it to say, meeting growth objectives to satisfy the quarterly expectations of Wall Street and investors led to mistakes in judgment by the banks and the mortgage lending company executives.” The subcommittee’s ranking Republican, Sen. Tom Coburn of Oklahoma, echoed Levin’s assessment. Coburn said that under Killinger, “WaMu’s corporate culture had no place for individuals concerned about high-risk lending, but instead brushed them aside and ignored them.” Levin and Coburn, opening statements, and Vanasek, testimony, Senate Permanent Subcommittee on Investigations, hearing on Washington Mutual, April 13, 2010,
http://www.hsgac.senate.gov/subcommittees/investigations
.
11
Subprime business had to be predatory to succeed
Lannoye interview, August 27, 2010.
12
Predatory lending means finding uneducated
Ibid.
13
Twice, Lannoye fought
Lannoye, interview, September 27, 2010.
14
Congress had opened the door
The Depository Institutions Deregulation and Monetary Control Act of 1980 effectively abolished state usury laws limiting rates of interest on first-lien mortgages.
15
Fannie Mae … Freddie Mac
Gretchen Morgenson and Joshua Rosner,
Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
(New York: Times Books, 2011), 34–40.
16
Long Beach loans made in 2003
Federal Deposit Insurance Corporation, report to Washington Mutual Bank’s board of directors, January 13, 2004, and visitation report by FDIC and Washington State director of banks to Washington Mutual, October 14, 2003, Exhibit 8B, Senate Permanent Subcommittee on Investigations, hearing chaired by Senator Carl Levin, April 13, 2010,
http://www.hsgac.senate.gov/subcommittees/investigations
. Hereafter “Levin subcommittee.”
17
Long Beach’s record was so bad
Ibid. Also, Washington Mutual internal email memo detailing Fitch rating agency review of Long Beach loan performance, April 14, 2005, Exhibit 8a, Levin subcommittee, April 13, 2010.
18
“We were paid by the total volume”
Heller, interview, August 9, 2010.
19
“A lot of coaching takes place”
Ibid.
20
“It was a fast-buck business”
Michael Lewis,
The Big Short: Inside the Doomsday Machine
(New York: W. W. Norton & Co., 2010), 9.
21
“Loan officers dropped their duty”
Heller, interview, August 9, 2010.
22
The obvious potential for fraud
Bre Heller, email, November 2, 2010.
23
One-third of the bank’s refinancing loans
Cheryl Feltgen, internal Washington Mutual memo, March 17, 2007, Exhibit 40B, Levin subcommittee.
24
“The only way to repay”
Lannoye, interview, August 27, 2010.
25
“The big thing was the sign”
Heller, interview, August 9, 2010.
26
“A product that was exotic”
Kathryn Keller, interview, August 9, 2010.
27
“One guy called me”
Eliseo Guardado, interview, October 3, 2010.
28
The Congressional Funding office was closed
Freddy Cova, interview, November 11, 2011; Brian Rios, interview with Owen Smith, January 9, 2012.
29
“It was a nightmare”
Guardado, interview, October 3, 2010.
30
“There was a high demand for subprime”
Lili Sotello, interview, August 30, 2010.
31
“Waves of defaults”
Ibid.
32
“The fraud was there”
Diane Kosch, interview, August 22, 2010.
33
“Loan officers were fired”
Ibid.
34
John Ngo, a senior loan officer
U.S. Department of Justice, news release, December 17, 2007, Exhibit 82, Levin subcommittee, hearing April 13, 2010,
www.hsgac.senate.gov//files/16/11/66/f161166/public/_files/Financial_Crisis/041310Exhibits.pdf
.
35
55 percent of subprime borrowers
“Subprime Debacle Traps Even Very Credit-Worthy,”
The Wall Street Journal
, December 3, 2007; “Policing Main Street,”
Newsweek
, July 25, 2010.
36
The floating-rate mortgage
Heller, interview, August 4, 2010.
37
Terboss spent $200,000
John Terboss, interview, September 2, 2010.
38
Terboss shared with me
Homegate Mortgage Company, fax letter, “Proposal for John Terboss, Prepared by Bob Norrris, 10/03/07,” provided by Terboss.
39
“It was a very strange closing”
Terboss, interview, September 2, 2010.
40
“I immediately called the bank”
Ibid.
41
“This is not how it was represented”
John Terboss, fax letter to Washington Mutual, December 11, 2007.
42
“It’s as if the broker”
David Leen, interview, August 30, 2010.
43
“I learned that the banking industry”
Terboss, interview, September 17, 2010.