Who Stole the American Dream? (67 page)
Read Who Stole the American Dream? Online
Authors: Hedrick Smith
1
“The American people”
Morgenson and Rosner,
Reckless Endangerment
, xiv.
2
“Our present economic crisis”
John C. Bogle, testimony, House Committee on Education and Labor, February 24, 2009.
3
It powered the growth of debt
Frank J. Fabozzi, Anand K. Bhattacharya, and William S. Berliner,
Mortgage-Backed Securities
(Hoboken, NJ: John Wiley & Sons, 2007), preface.
4
Greenspan dismissed the risk
Alan Greenspan, remarks, annual convention of Independent Community Bankers of America, Orlando, FL, March 4, 2003.
5
“Greatest global financial crisis ever”
Alan Greenspan, citing Federal Reserve data, in “Activism,”
International Finance
14, no. 1 (Spring 2011),
http://www.cfr.org
.
6
“I found a flaw in the model”
Alan Greenspan, testimony, House Committee on Oversight and Government Reform, October 23, 2008.
7
Greenspan went on to admit that the crash
Greenspan, citing Federal Reserve data, in “Activism.”
8
“A shift in the mortgage product”
James Grant,
Mr. Market Miscalculates: The Bubble Years and Beyond
(Mt. Jackson, VA: Axios Press, 2008), 138.
9
Greenspan hailed this trend
Alan Greenspan and James Kennedy, “Sources and Uses of Equity Extracted from Homes,” Finance and Economics Discussion Series, working paper, March 2007,
http://www.federalreserve.gov
.
10
Greenspan welcomed that mountain of borrowing
Greenspan, remarks at annual convention of the Independent Community Bankers of America, Orlando, Florida (via satellite), March 4, 2003,
http://www.federalreserve.gov
.
11
“Were it not for this phenomenon”
Alan Greenspan, testimony before the Joint Economic Committee, November 13, 2002,
www.federalreserve.gov/boarddocs/testimony/2002/20021113/default.htm
.
12
American homeowners lost trillions
Dean Baker,
False Profits: Recovering from the Bubble Economy
(San Francisco: Berrett-Koehler, 2010), 2; also Dean Baker, co-director of the Center for Economic and Policy Research, interview, October 15, 2010.
13
The homeowners’ share of housing wealth
Board of Governors of the Federal Reserve System, “Flow of Funds Accounts of the United States, Annual Flows and Outstandings,” chart B.100, 1985–1994, 1995–2004, 2005–2010, and Current (fourth quarter 2011), March 8, 2012,
http://www.federalreserve.gov/releases/z1/Current/annuals/a2005–2010.pdf
;
and 2011 figures from
http://www.federalreserve.gov/releases/z1/Current/z1/pdf
.
14
Homeowners lost nearly a 30 percent stake
Dean Baker, interview, October 25, 2010.
15
Nearly one-fifth of older boomers
Baker,
False Profits
, 46–56.
16
Greenspan, who credited this process
Alan Greenspan, “Risk Transfer and Financial Stability,” remarks, Federal Reserve Board of Chicago, May 5, 2005.
17
“Ordinarily, the instinct”
Johnson and Kwak,
13 Bankers
, 130–31.
18
Vastly poorer—$9 trillion
poorer Federal Reserve System, “Flow of Funds Accounts,” chart B.100, 1985–1994, 1995–2004, 2005–2010, and Current (fourth quarter 2011), March 8, 2012, reports a homeowner loss of equity from $15.3 trillion in 2005 to $6.2 trillion at the end of 2011, figures adjusted for inflation to 2012 values,
http://www.federalreserve.gov/releases/z1/Current/z1.pdf
.
19
“This elimination of usury law ceilings”
Edward Gramlich,
Subprime Mortgages: America’s Latest Boom and Bust
(Washington, DC: Urban Institute Press, 2007), 16.
20
It also permitted something never allowed
Johnson and Kwak,
13 Bankers
, 72; Lewis,
Big Short
, 51.
21
“The most important legislation for financial institutions”
President Ronald Reagan, signing remarks, Public Law 97–320, October 15, 1982,
http://www.Reagan.utexas.edu
.
22
Mortgages loaded “with poisonous features”
Gretchen Morgenson, “Some Bankers Never Learn,”
The New York Times
, July 31, 2011.
23
This law sanctioned the
“securitization” of mortgages Fabozzi, Bhattacharya, and Berliner,
Mortgage-Backed Securities
, preface.
24
Lewis Ranieri, a legendary
Salomon Brothers trader Johnson and Kwak,
13 Bankers
, 72–76; Lewis,
Big Short
, 8.
25
Greenspan instituted
William A. Fleckenstein with Frederick Sheehan,
Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve
(New York: McGraw-Hill, 2008), 120, 128; Board of Governors of the Federal Reserve System, “Open Market Operations Archive: Intended Federal Funds Rate, Change and Level,” accessed March 19, 2012,
https://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm
; and
https://www.federalreserve.gov/monetarypolicy/openmarket.htm#calendars
.
26
It gave housing a kick start
Asha Bangalore, Northern Trust Company, “Housing Market—Another Information Tidbit,” May 23, 2005,
www.northerntrust.com/library/econ_research/daily/us/dd052305.pdf
.
27
More than $1 trillion a year
Baker,
False Profits
, 34.
28
A “rocket taking off”
Robert J. Shiller,
Irrational Exuberance
, 2nd ed. (New York: Broadway Books, 2005), 12.
29
In the 114 years
Ibid., 12, 20.
30
But Greenspan took heart
Alan Greenspan, remarks, Federal Reserve Community Affairs Research Conference, April 8, 2005.
31
“Many homeowners might have saved”
Alan Greenspan, “Understanding Household Debt Obligations,” speech to Credit Union National Association, Governmental Affairs Conference, February 23, 2004.
32
He led the Fed through fourteen interest rate hikes
Board of Governors of the Federal Reserve System,
http://www.federalreserve.gov/monetarypolicy/default.htm
. The first raise on June 30, 2004, increased the rate to 1.25 percent, and the final one, on Greenspan’s last day as Fed chairman, on January 31, 2006, raised the rate to 4.5 percent.
33
Housing prices from the late 1990s
Shiller,
Irrational Exuberance
, 13.
34
“The growth of
housing prices
”
Johnson and Kwak,
13 Bankers
, 112.
35
Massive defaults were inevitable
Shiller,
Irrational Exuberance
, 13.
36
Gramlich cautioned Greenspan
Gramlich,
Subprime Mortgages
, 6; Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” lecture, Federal Reserve Bank of Kansas City symposium, August 30–September 1, 2007, 106, published in
Economic Review
(Fourth Quarter 2007), Federal Reserve Bank of Kansas City,
http://www.kansascityfed.org/publicat/econrev/PDF/4q07Gramlich.pdf
.
37
51 percent of subprime loans
Gramlich,
Subprime Mortgages
, 21; Greg Ip, “Did Greenspan Add to Subprime Woes?”
The Wall Street Journal
, June 9, 2007.
38
“Like a city with a murder law”
Gramlich, “Booms and Busts.”
39
“What we forgot”
Johnson and Kwak,
13 Bankers
, 142–44.
40
No Bush official wanted
Jo Becker, Sheryl Gay Stolberg, and Stephen Labaton, “White House Philosophy Stoked Mortgage Bonfire,”
The New York Times
, December 21, 2008.
41
Mortgage debt had reached dangerous levels
David Cay Johnston, “Business; In Debate Over Housing Bubble, a Winner Also Loses,”
The New York Times
, April 11, 2004.
42
Shiller’s warning was more stark
Robert J. Shiller, “Household Reactions to Changes in Housing Wealth,” Discussion Paper 1459 (New Haven, CT: Cowles Foundation, Yale University, April 2004),
http://cowles.econ.yale.edu
.
43
“May be the biggest bubble in U.S. history”
Robert J. Shiller, cited in Paul Krugman, “Running Out of Bubbles,”
The New York Times
, May 27, 2005.
44
“When home prices do start down”
Fleckenstein,
Greenspan’s Bubbles
, 145.
45
Greenspan dismissed talk of a housing “bubble”
Alan Greenspan, “The Economic Outlook,” opening statement, Joint Economic Committee, U.S. Congress, June 9, 2005; Johnson and Kwak,
13 Bankers
, 147.
46
“Greenspan’s policies at the Fed”
“Perry’s Public Service,”
The Wall Street Journal
, August 18, 2011.
47
Bank CEOs such as Killinger
“Home Loans Discussion,” confidential memo from home loans president David Schneider to Washington Mutual board of directors, April 18, 2006; Exhibit 3, Levin subcommittee, hearing April 13, 2010.
48
Worried about the high level of risk
Kerry Killinger, email to James Vanasek, March 10, 2005, Exhibit 78, Levin subcommittee.
49
Wall Street stock analysts asked Killinger
Washington Mutual, pricing guides, November 2, 2006, belie Killinger’s contention about risk control. In November 2006, the bank was still offering huge bonuses to brokers for steering borrowers into high-risk Option ARMs.
50
“You’ve seen us sell”
Kerry Killinger, Strategic Decisions Conference, Sanford C. Bernstein & Co., June 1, 2005.
51
The highest loan delinquency rate of any bank
Office of Thrift Supervision, internal memo, April 14, 2005, Exhibit 8a, Levin subcommittee, April 13, 2010; James A. Vanasek, chief risk management officer, Washington Mutual, 1999–2005, statement to Levin subcommittee hearing, April 13, 2010. By comparison, Vanasek reported losses on fixed-rated thirty-year mortgages as less than one-tenth of 1 percent.
52
Had to be shut down entirely
Senator Levin, opening statement, hearing, April 13, 2010; see also memorandum to Washington Mutual Board of Directors from General Auditor Randy Melby, April 17, 2006, Exhibit 10, Levin subcommittee, April 13, 2010.
53
Wall Street was so slow to detect
Senator Levin, transcript, hearing, April 13, 2010, Senate Permanent Subcommittee on Investigations, 66, citing SEC filings by Washington Mutual, Levin noted that the bank’s Option ARM sales had been $67 billion in 2004 and $63 billion in 2005.
54
Option ARMs had been recklessly approved
Ronald Cathcart, chief risk management officer, Washington Mutual, December 2005–April 2008, prepared statement, April 13, 2010, Levin subcommittee hearing.
55
“Employee malfeasance”
Memo to James Vanasek, Washington Mutual, November 17, 2005, Exhibit 22a, Levin subcommittee; Retail Risk Overview, Washington Mutual Credit Risk Management, November 16, 2005, with attached chain of email messages, Exhibit 22b, Levin subcommittee, April 13, 2010.
56
The prime offenders Final report
, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” April 13, 2011, Levin subcommittee, 95–101.
57
“Extremely high incidence of confirmed fraud”
Tim Bates, email to James Vanasek, August 30, 2004, Exhibit 23b, Levin subcommittee; “Memorandum of Results: AIG/UG and OTS Allegation of Loan Frauds Originated by [name deleted],” Washington Mutual, April 4, 2008, Exhibit 24, Levin Subcommittee, April 13, 2010; Ann Hedger, Office of Thrift Supervision examiner, “Loan Fraud Investigation,” to David Schneider, president of home loans, Washington Mutual, June 19, 2008, Exhibit 12a, Levin subcommittee, hearing, April 6, 2010,
www.hsgac.senate.gov//files/16/11/66/f161166/public/_files/Financial_Crisis/041610Exhibits.pdf
.
58
“Found to be completely fabricated”
Washington Mutual, string of emails, August 29, 2005, to November 19, 2005, and December 14, 2007, Exhibits 23a and 23b, Levin subcommittee, April 13, 2010.
59
But no firings or shake-ups
Loan Fraud Investigation Report, Washington
Mutual, January 7, 2007, Exhibit 25, Levin subcommittee; Risk Mitigation and Mortgage Fraud Review, September 8, 2008, Exhibit 34, Levin subcommittee, April 13, 2010.
60
Insurance giant AIG
“Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,”
Majority and Minority Staff Report
, Senate Permanent Subcommittee on Investigations, April 13, 2011, 96–101.
61
“Elements of fraud found by AIG”
Loan Fraud Investigation Report, Washington Mutual, Jan. 7, 2007, Exhibit 25; Risk Mitigation and Mortgage Fraud Review, Sept. 8, 2008, Exhibit 34, Levin subcommittee, April 13, 2010.
62
Still, WaMu’s top brass
Majority and Minority Staff Report
, “Wall Street and the Financial Crisis,” April 13, 2011, 63.
63
WaMu’s leaders showered
Fragoso “Awards Night Show Script,” Washington Mutual Home Loans President’s Club 2005—Maui, Exhibits 63a and 63b, Levin subcommittee, April 13, 2010.