There's a renewed push for apprenticeship programs in the U.S., one supporters say can address a shortage of skilled workers and the financial burden on young people today.
Late Friday, the Federal Housing Finance Agency filed lawsuits against some of the world’s biggest banks. The seventeen suits alleged that the banks sold Fannie Mae and Freddie Mac nearly $200 billion in fraudulent mortgage investments. The U.S. government wants billions of dollars in compensation. It’s the setup for a brutal legal fight that could last years. The banks say the FHFA should have known better. The government says banks deliberately deceived it. A look at the role big banks played in the mortgage crisis and what it means for ongoing economic recovery.
- Andrew Sandler chairman and executive partner of Buckley Sandler law firm and CEO of Treliant Risk Advisers.
- Phil Mattingly economics and finance reporter, Bloomberg News.
- William Cohan contributing editor at Vanity Fair, opinion columnist for Bloomberg View; author of "Money and Power: How Goldman Sachs Came to Rule the World"; and former investment banker.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The U.S. government says big banks sold Fannie Mae and Freddie Mac nearly $200 billion worth of tainted mortgage-backed securities. On Friday, the Federal Housing Finance Agency sued 17 of those big banks. That's ignited legal battle that some say is long overdue but will ultimately take years to resolve.
MS. DIANE REHMJoining me here in the studio to talk about the lawsuits, their economic implications: Bloomberg News reporter Phil Mattingly, Andrew Sandler of Buckley Sandler law firm and, from the NPR studio in New York, William Cohan. He's author of "Money and Power: How Goldman Sachs Came to Rule the World." Throughout the hour, I'll look forward to hearing from you.
MS. DIANE REHMYou can join us by phone. You can send us your email. Join us on Facebook, our website, or send us a tweet. And good morning to all of you. Thank you for joining us. Phil Mattingly, I'm going to start with you. Tell us what these lawsuits say and do.
MR. PHIL MATTINGLYWell, we saw on Friday when these suits were filed is essentially what the FHFA, the regulator of Fannie Mae and Freddie Mac, the GSEs, is saying that these banks, 17 largest banks, the most prominent in the world, mislead or omitted information in their securities filings in these mortgage-backed securities that they were selling to Fannie Mae and Freddie Mac.
MR. PHIL MATTINGLYBasically, what they're saying is that these banks, in some cases, deliberately duped or mislead these mortgage giants which, in the lead up to the financial crisis, more or less, sat at the center kind of of the mortgage finance world.
REHMWas the lawsuit a surprise?
MATTINGLYThere had been indications that this was coming. The FHFA, especially Acting Director Edward DeMarco was dealing with a statute of limitations issue. The New York Times actually broke the story the morning of, so we knew that they were coming in the afternoon. We didn't know exactly when. But, you know, like a lot of these lawsuits, people are aware that something is going to happen. The size, the scope, who they're going to go after is largely a secret.
REHMTake us a little ways back. What was the impact of the mortgage crisis on Fannie Mae and Freddie Mac?
MATTINGLYThe mortgage crisis, in terms of Fannie Mae and Freddie Mac, it essentially left them insolvent. So far, they were taken over in September of 2008 by the federal government. At this point, they've drawn, I think, around between 170 and $175 billion in aid from U.S. taxpayers. They're essentially operating as an arm of the federal government.
REHMPhil Mattingly, he's economics and finance reporter for Bloomberg News. Turning to you, William Cohan. You say these suits are long overdue.
MR. WILLIAM COHANWell, you know, I think, Diane, it's important to think about this in context. And what I mean by that is, as Phil was saying, the -- basically, these two -- Freddie and Fannie are in conservatorship, which is a fancy government way of saying bankruptcy.
MR. WILLIAM COHANAnd in bankruptcy court, an important asset of any bankrupt company are, unfortunately or fortunately, depending if you're a creditor or not, lawsuits against people who they think got them into the trouble they're in. So because of the statute of limitations that Phil mentioned, the three years, basically, they had no choice but to file these lawsuits, put -- play the marker in the ground and go after these 17 firms for what they hope will be billions and billions of dollars.
MR. WILLIAM COHANI do note with interest, Diane, that about 60 years ago when the Justice Department sued a bunch of Wall Street firms for antitrust, perceived antitrust violations, there were 17 firms that they sued. I don't know what the magic is with 17, but here we have it again.
REHMAnd how successful do you think these suits could be?
COHANI really am of two minds about that. I mean, clearly, there was wrongdoing here. Clearly, mortgages that had no chance of being paid off by the people who took them out were packaged up into mortgage-backed securities by Wall Street firms and sold to investors all over the world. On the other hand, who encouraged them to do that?
COHANWell, the U.S. government in terms of its policy on encouraging people to own homes and Fannie and Freddie were right there in the thick of it, encouraging Wall Street to package up these securities and sell them in the form of guarantees and in the form of just good overall policy that they thought would benefit more and more people.
REHMAnd wasn't the Congress also involved in encouraging Fannie and Freddie?
COHANVery well said. Of course, Congress was the great enabler of Fannie and Freddie. So, you know, it's sort of like an internecine warfare. It's like a battle between, you know, brothers here. But, really, what it comes down to is it -- in the asset of these bankrupt estates in a sense, these lawsuits. And so they're just sort of obligated from a legal point of view to try to get money from the deep-pocketed Wall Street firms.
REHMWilliam Cohan, his book is titled "Money and Power: How Goldman Sachs Came to Rule the World." And to you, Adam Sandler (sic), do you think these lawsuits have merit?
MR. ANDREW SANDLERWell, the lawsuits -- we have to look at the background here to answer that question. First, we look at who knew what, when and how. If we take a look back at the early 2000s, what was going on, everybody understood that loans that were made to borrowers with no documentation had a lot of risk, that loans that were made to borrowers that would -- that were adjustable-rate mortgages that would adjust in two years at a higher interest rate had risk.
MR. ANDREW SANDLERAnd many believed that Fannie and Freddie, which were the real experts, knew all of this better than anybody else. So we had a situation where borrowers, sometimes knowingly, sometimes not, took on a lot of risk, where loan originators knew they were making loans that had a lot of risk, where the defendants in this lawsuit who were securitizing those loans knew about the risk. And, certainly, Fannie and Freddie knew that there was a lot of risk.
MR. ANDREW SANDLERAnd so, in the law, there are two legal concepts that are in play here. One is the concept of willful blindness. Can Fannie and Freddie rely on prospectuses, registration statements, representations, which they had good reason to believe might be problematic -- and they had as much information as anybody -- or strict liability?
MR. ANDREW SANDLERAre we in a situation where it did not matter what Fannie and Freddie really knew they had the right to rely exclusively on what they were hearing from the defendants in this case? It's going to be very interesting to see how those two legal concepts play out here. Each of the agreements was different, had different contractual language.
MR. ANDREW SANDLERReally, each loan had different attributes attached to it. If this is really going to be litigated for -- through the whole process, we are in for a long, slow slog.
REHMAnd how have the banks reacted?
SANDLERWell, I think the banks have reacted with frustration. And that is because, at the very same time that FHFA, the regulator, is requiring Fannie and Freddie to sue their business partners -- the banks here -- the administration is pushing the banks very hard and Fannie and Freddie very hard to work cooperatively to try to help work through the financial crisis.
SANDLERMost recently, the administration has come up with this refinance plan to help borrowers who are struggling to make their mortgage payments, but whose homes may be under water, to be able to refinance. So, on the one hand, the banks are under all this pressure to work with Fannie and Freddie and others to make somewhat risky loans in order to help the country get through this crisis. On the other hand, they're being attacked.
SANDLERI think the executives at Fannie and Freddie are probably just as frustrated at their government masters, FHFA, requiring them to sue their business partners and, thereby, in some sense, make it more difficult to move forward.
REHMAndrew Sandler, he's chairman, executive partner of the Buckley Sandler law firm. And we are going to take your calls, 800-4333-8850. Send us your email to email@example.com. Join us on Facebook or Twitter. Phil Mattingly, Andrew Sandler twice used the phrase business partners. Explain that relationship between FDHA (sic) and the banks.
MATTINGLYWell, the FHFA is the overseer of Fannie and Freddie. The banks obviously are -- have dealt a lot with Fannie and Freddie over the last few years. I think what Andy underlines here is a delicate balance, that kind of all government is facing, as they pursue these claims, as they look at -- look back at this crisis and try and figure out who we're going to go after, when we're going to after them.
MATTINGLYThey have to look at the broader economy, which by no means is booming at the moment. They have to look at these financial institutions, which certainly are not booming. You look -- just the threat of this suit on Friday was driving bank stocks down 4 or 5 percent. You look at Bank of America. You look at Citigroup. None of their stocks are doing very well.
MATTINGLYThey have to decide, do we go after these institutions, especially if we have evidence that they mislead or they duped investors? Or do we have to look out for the broader good of the economy?
REHMPhil Mattingly of Bloomberg News. We'll take just a short break here, and when we come back, your comments, your questions. Stay with us.
REHMWelcome back as we talk about the lawsuit that was filed on Friday by the Federal Housing and -- let's see. What's it called again?
SANDLERFederal Housing Finance Agency.
REHMOkay. The Federal Housing Finance Agency. Bill Cohan, how did Fannie and Freddie get into this mess?
COHANOh, well, I think it goes back to, you know, how their mandate changed over time. And, you know, when they became public companies, like every public company, they are very focused on quarterly earnings and profitability and stock price. And, you know, their executives became very much focused on how much they could get paid themselves.
COHANI think, you know, if you look at a presentation, confidential presentation that came to light in a 2008 congressional hearing on Fannie and Freddie that refers to something that was in the files of Fannie Mae CEO Daniel Mudd in June 2005, basically, it was about the strategic direction that Fannie would go in after June of 2005.
COHANAnd, basically, he was deciding whether to say, you know, stay the course and be sort of more conservative with their investments and their participation in the mortgage market, or whether they should, you know, "invest in subprime," in alternative mortgages, which would mean higher credit losses and increased exposure to unknown risks. But the lure of additional profits proved to be too great.
COHANIn other words, they knowingly -- according to this confidential presentation, which is no longer confidential, thanks to congressional hearing -- you know, they knowingly took the decision to ramp up the amount of risk they were taking by investing in subprime, in Alt-A mortgages in terms of the securities that were packaged up into mortgage-backed securities. And they knew that they could be, hopefully, more profitable as a result.
COHANSo everybody saw the gravy train of mortgages. I mean, for a while, their mortgages was the most perfect product on the face of the earth. Everybody who touched it made money, and, as a result, you know, credit standards just totally went out the window in the face of, you know, just huge amount of greed.
REHMBut let me ask you, Bill Cohan, weren't Freddie and Fannie required, in some way, to back these loans to low- and moderate-income and minority borrowers? And weren't they, indeed, pressured by Congress to do exactly that?
COHANOf course, you're absolutely right. The question is, is, you know, how much risk they decide to take? How much, you know -- whether they buy securities that are packaged up, made of subprime mortgages, i.e. the riskiest, or Alt-A, slightly less risky? And, basically, Fannie and Freddie decided to go whole hog. And, yes, they were absolutely pressured and enabled by their congressional sponsors.
COHANAnd there was a huge revolving door between Congress and Fannie Mae, just as there's a huge revolving door between the regulators in Washington and Wall Street. It was a, you know, an incredibly lucrative daisy chain for everybody involved until the music stopped.
SANDLERThe -- there's another reason, and that goes to the fundamental problem with the way Fannie and Freddie were structured because the risk analysis that Bill talks about wasn't just economic risk. Do we take more risk for the possibility of more profit? There was public policy risk.
SANDLERThe -- Fannie and Freddie were under so much pressure from Congress and others to help low- and moderate-income and minority borrowers reach the American dream of homeownership that their ability to be profitable in other aspects were directly tied to whether they made enough of these kinds of loans to satisfy Congress and other government agencies.
SANDLERAnd as we look back on this crisis and we look back on why Fannie and Freddie are where they are today, we should not lose sight of that aspect of the problem.
REHMPhil Mattingly, this lawsuit is particularly damaging to Bank of America. How so?
MATTINGLYWell, I think this lawsuit is just yet another problem that they're having in terms of liability issues with mortgages. You look back. This hits them in three separate areas: their purchase of Countrywide during 2008, their crisis merger with -- or purchase of Merrill Lynch and their own mortgage book. This is one of probably more than a dozen, at this point, lawsuits that all banks are facing from investors and agencies.
MATTINGLYBank of America is just dealing with this, especially because of their Countrywide purchase, on a level that no other financial institution is. And I think if you look at -- when you talk to analysts, when you look at what investors are saying right now with the bank, you look at their stock price, especially, is they're saying, look, it's not so much that these lawsuits are so large or that we feel like they're going to have a severely negative impact on the institution.
MATTINGLYIt's that we don't know what they're going to end up being. We don't know the ultimate size and scope. It's the uncertainty that is having such a negative impact on the bank right now.
REHMWhat kind of impact could this lawsuit have on consumers?
MATTINGLYIt'll be interesting to see. I think, you know, what Bill had said earlier, the FHFA is more or less required to go after -- under the court of law, they're required to go after these institutions if they find that some type of illegality took place. I think, when you look at the financial crisis as a whole, people are looking back at -- all the people that are out of homes, all the people that lost their savings, everybody's 401 (k) -- and saying, who's going to jail?
MATTINGLYWho's been taking the task? All these types of issues. And, look, there's plenty of arguments on both sides, as to why that is the case as it currently stands. What these lawsuits are all going to be interesting to watch, this, the negotiations with the Department of Justice and states' attorneys general, over some of the robo-signing issues, all of these throughout.
MATTINGLYIt's going to be interesting to watch, you know, who gets their pound of flesh, but also, you know, what the punishment -- when we look back at the crisis of 2008, however long the fallout takes, what the punishment actually will be, what the magnitude of that actually is.
REHMBill Cohan, I want to ask you specifically about Goldman Sachs because there is a specific reference to the actions of Goldman Sachs in this lawsuit. Talk about that.
COHANWell, you know, again, as Phillip was saying, the suit against Goldman, which runs to, like, 170 pages or something, basically talks about their failure in their mortgage-backed securities, SEC filings, to properly disclose risk involved in these securities to the buyers, which happened to be, in part, Fannie and Freddie. I mean, there's a number of interesting things about Goldman.
COHANNumber one, they relied, like other firms did, on intermediaries to check the validity of the mortgages that were being packaged up and put into these mortgage-backed securities. And the lawsuit specifically mentions Goldman's failure to take the advice of one of these intermediaries, which was -- had the name of Clayton. And, you know, Clayton was telling Goldman that, you know, these sets of mortgages aren't good.
COHANThey're either, you know -- people have -- in the process of defaulting or likely to default. And Goldman just packaged them up again. They weren't unique. They just packaged them up as if they were perfectly fine and then put them into mortgage-backed securities.
COHANThe thing that really makes it more complicated for Goldman, of course, is that we all know now that, beginning in 2006, specifically in December of 2006, Goldman decided to short the mortgage market in a big way and made $4 billion...
REHMYou mean bet against.
COHANBet against the very securities, Diane, that they were continuing to package up and sell as investments to the markets. So they made this bet against the mortgage market in December of 2006. For the next six months, through most of 2007, they continued to sell these mortgage-backed securities at 100 cents on the dollar as if they were perfectly fine. Now, how did they decide to make the big bet against the mortgage market?
COHANIn part, they were following one of their clients' actions, which was John Paulson, the famous hedge fund investor who made, of course, you know, $12 billion betting against the mortgage market.
COHANIn part, they were reading the trustees' reports on each one of these individual mortgage-backed securities, which, during the months of 2006, showed publicly -- this was available information -- showed the deterioration in the performance of these mortgages and people defaulting on their mortgages.
COHANSo Goldman knew that these mortgages were defaulting and not doing well, bet against them and continued to sell them separately at another part of the firm at 100 cents on the dollar to investors. Now, that should be illegal. I don't think it is. And the lawsuit here, I think...
COHANWell, why not? Because, you know, Goldman makes this argument that they made in April 2010 in front of the Levin hearing, that they're just market makers. They're just giving people the risk that they want. You've got some people who want to short the market, bet against the market. Some people want to buy the securities and supposedly get the high-yielding...
REHMSure, some people. But if you got the same institution doing that on both sides of the barrel, then you've got a problem.
COHANI would agree with you completely, especially when, at the top of the food chain, you know, they know exactly what both sides are doing.
REHMAll right. Now, considering what Bill Cohan has just said, isn't it fair to say that Fannie and Freddie were actually victims? Or are they considered so sophisticated that they should have known all this playing around was going on, Adam (sic) Sandler?
SANDLERDiane, Adam is the funny side of my family. I'm Andy. With respect to the question, Fannie and Freddie knew. They knew the risk as well as anybody else. Bill noted a 2006 report. Fannie and Freddie had access to that report. What happened was, for Fannie and Freddie, as well as everybody else, this was a very profitable business until the roof caved in.
REHMBy the way, is Adam your brother?
SANDLERHe is not my brother. I'm told a distant relative, but the sense of humor did not travel across the bloodlines.
REHMOkay. What is your view, Bill Cohan? Is it fair to say that Fannie and Freddie were actually victims?
COHANNo. I don't think they were victims. They were players at the table, Diane. They -- you know, the executives of Fannie and Freddie -- I mean, Franklin Raines alone, who was the CEO of Fannie during much of this time, got paid, like, $90-plus million. He was a former partner at Lazard Freres & Co., where I once worked.
COHANI mean, these people were very, very sophisticated players. And Andy is absolutely right that there was just so much money to be made. These were public companies. Their -- the compensation packages for these CEOs were tied to the stock price. I mean, I think, you know, Gretchen Morgenson lays this out very well in her book.
COHANYou know, you can believe it or not, but it's a fairly devastating portrayal of something we all suspected anyway, of just how much involved Fannie and Freddie were driven, of course, by the public policy. You can't forget the importance of the Community Reinvestment Act and the Clinton administration, the Bush administration pushing people to own homes.
REHMWilliam Cohan, he's a contributing editor at Vanity Fair. He's a columnist for Bloomberg View and author of "Money and Power: How Goldman Sachs Came to Rule the World." And you're listening to "The Diane Rehm Show." We have many callers. I want to open the phones now. First to Hollywood, Fla., and to Mitch. Good morning. You're on the air.
MITCHGood morning. Thank you for taking my call.
MITCHI'm a certified state residential real estate appraiser. Should I overvalue a property by 30 percent, I risk civil as well as criminal charges. I can be sued. I can be put in jail. Needless to say, have my license taken away. Fitch, Moody's and Standard & Poor's were appraising these packages of mortgages.
MITCHWhat's going on? Why were they rated AAA? Why were they not rated C? A seven-year reverse-equity mortgage is rated the same as a 30-year fixed rate?
REHMPhil Mattingly, what about the ratings agencies?
MATTINGLYWhen you look back at the investigations committees -- I think, Bill referenced one. Be it the Financial Crisis Inquiry Commission, the Senate permanent subcommittee on investigations, all of their work has pointed in one way or another to the credit ratings agencies as not necessarily primary causes of the financial crisis but certainly drivers, certainly people that added fuel to the fire.
MATTINGLYPeople were so reliant, investors were so reliant, firms were so reliant on their ratings -- they did little of their own research. These ratings firms, in the regulations that have come afterwards, the Dodd-Frank law and these lawsuits, they have largely gotten off without much in terms of punishment. And their view is this, look, we -- we're giving our opinion. This is not binding. This is not exactly what has to be correct.
MATTINGLYThis is what we feel as we look at this material. Now, obviously, lawmakers, government officials, people on -- as Mitch is saying, heartily disagree with what they've said. But, you know, in terms of how they stand on legal issues, they've largely been in the clear.
REHMWhat do you think, William Cohan, about the ratings agencies? Should they go absolutely absolved of any responsibility?
COHANDiane, they are hugely responsible for the problem. And Philip is absolutely right. They basically escaped. I mean, why isn't there a lawsuit against Fannie -- S&P, Moody's and Fitch? Where is the FHFA on that? The truth is here that the rating agencies were in the pockets of the Wall Street banks. The Wall Street banks paid their fees to rate these securities. So, I mean, people do what they're rewarded to do.
COHANThe rating agencies were rewarded by the banks to give AAA ratings. They did that. They abdicated their fundamental responsibility to protect people who bought these securities. That was their job. They abdicated it because of the mighty dollar that they were trying to chase. And they definitely deserve to have their day in court, frankly. And Phil's right.
COHANThe Dodd-Frank law basically absolves them, and even the SEC's new regulations pertaining to the rating agency is basically a slap on the wrist. Very little has changed.
SANDLERYeah, Mitch's point about appraisal and how that relates to rating agencies and others is a really good example because somebody like Mitch, who appraised a loan in 2003 or 2004 and did his best to come up with a valuation, did he -- what, did it look 30 percent too high then?
SANDLEROr is it like the situation in these lawsuits and like the issues we're talking about today, when somebody comes along in 2011 and looks at Mitch's 2003 appraisal and says, well, wait a second, looking back, it appears to us that Mitch overvalued that property by 30 percent? So, without making excuses for anybody in the process, we need to keep our eye on the ball, which is it's very difficult when you look back at things with 20/20 hindsight.
REHMAndrew Sandler. We'll take a short break here. More of your calls when we come back.
REHMAnd welcome back. Let's go now to Melbourne, Ky. Good morning, Laura. You're on the air.
LAURAGood morning. And, Diane, great show. I don't know what we would do without you.
LAURAMy question goes to your queries regarding whether Fannie and Freddie were victims or knowing participants. I'll defer to experts with respect to opinion, but I can't help but think of a movie that several of us recently watched. And -- I'm sorry -- I don't know who produced the movie. But Matt Damon narrated it, and it was called "Inside Job."
LAURAAnd all of us watching the movie were left with the inference or perception that the government would have remained passive, but for fear that the private sector -- and through the media and entertainment channels, were exposing some of the hand-holding between -- giving an example, in the movie for anyone who's seen it, many of the people who were involved in some of these packagings and tradings actually ended up in advisory capacities to the government.
LAURASo I'm just wondering if, in fact, your guests would agree that the government really is being reactive rather than proactive, and it serves the government to characterize Fannie and Freddie as victims.
REHMAll right. William Cohan.
COHANWell, I think the caller is right. It does serve the government's narrative to suggest that Fannie and Freddie were victims here of the sophisticated Wall Street firms. But, you know, that is the nature of lawsuits. I mean, that is the way one side needs to project its view when filing a lawsuit. But the fact of the matter is it's just not accurate. Fannie and Freddie were accomplices in this whole crisis, and, you know, that will come out in court.
COHANAnd -- my supposition here, by the way, is that it ain't going to get that far. It's going to go the way of -- in my opinion, of the way, you know, Spitzer lawsuit against the banks 10 years ago involving Internet IPOs when, you know, they all settled, got together and settled for a billion four. I'm sure they're all going to get together and settle this. It will be more than a billion four, but this ain't going to go into court.
REHMI'm looking at a column by Jeff Sica about this lawsuit, which is titled "Empire Of Dirt - 'Let them fail': Why Failing Banks Should Fail." What do you think about that, Phil Mattingly?
MATTINGLYWell, you know, it's an interesting point. I think when you look back in dealing with -- working -- not working with, but covering the policymakers back in 2008, I think, when the last time we were really confronted with massive -- the bank -- the failure of a massive bank, of all institutions...
MATTINGLY...in concern that the entire financial system would drop. You know, there are two very different perspectives of -- in 2008, along with Lehman, everybody else should have failed that was going to. And government intervention created the moral hazard, which, at this point, now investors expect, especially with a firm like Bank of America or Citigroup, should they ever come to the brink, the government will step in and save them.
MATTINGLYI think looking back at 2008, at least in my experience in covering Congress and in covering Treasury, those policymakers were scared to death that, should they let one firm go down, it would create a domino effect.
MATTINGLYWe'd lose the entire the financial system. And in the United States of America, which is more or less the driver of the financial system around the world, if that goes down, everything else goes down with it. And what does that do? It plunges the U.S. into something worse than the Great Depression.
REHMAnd what we seem to have, according to Jeff Sica, is that banks survived, and the rest of the economy is still suffering. William Cohan.
COHANWell, that -- he's absolutely right. I mean, you know, as people may remember, I wrote a book about the collapse of Bear Stearns called "House of Cards." And, you know, I studied it very carefully, and I studied the reasons why Paulson and Geithner and Bernanke decided to save it. And then, you know, once upon a time, beginning in January of 2010, I had a regular column in The New York Times.
COHANIn my first column, I wrote about -- this was in, now, January of 2010, that they should have let, in retrospect, Bear Stearns fail. And the reason is that -- while I understand why they didn't let it fail because, as Phil was saying, they thought it would create a domino effect. I think, in retrospect, it sent the wrong message to the rest of Wall Street.
COHANHad they let Bear Stearns fail -- which it would have done, no question about it. It was on its way. People didn't want to do business with it anymore -- then people like Dick Fuld and Stan O'Neal, or at that point, John Thain at Merrill Lynch and others would have gotten the serious message that the government was not going to step in and save them.
COHANI mean, Dick Fuld was holding out hope until the very end, Sept. 14 of 2008, that he was going to get saved by Paulson, Bernanke and Geithner. So the wrong message was sent. I understand why they did it. But in retrospect -- and that's easy to be 20/20 hindsight. But in retrospect, they should have let it fail.
COHANAnd these -- the problem here is that the way Wall Street financed itself was bankrupt. The way Wall Street was constructed and remains constructed is basically that of a bankrupt enterprise.
REHMSo what would you have in its place?
COHANWell, I think there are many examples of Wall Street firms that are not the kind of casinos that the publicly-traded Wall Street firms became, I mean, firms like Lazard, which I worked at, and Greenhill and Evercore and some of the smaller boutiques that are rising out of the ashes. I mean, there's money to be made, Diane. Wall Street will figure out a way to make it.
COHANBut these firms, Goldman, Merrill, Morgan Stanley, Lehman, Bear Stearns became casinos, where they were using, and rewarded for using, other people's money for taking, you know, risks where they got the benefit and everybody else got the liabilities if they came along. And so the whole construct of Wall Street got warped when these firms started going public.
COHANAnd the easiest thing to do would have been to let that business model collapse because it was bankrupt. And out of those ashes, believe me, in about a nanosecond, other firms would have risen to take advantage of the business opportunities.
REHMAll right. Let's go to Dallas, Texas. Good morning, Wayne.
WAYNEGood morning. I'm concerned about the question of whether or not Fannie and Freddie are victims. I think it's irrelevant. I think the taxpayers are the victims, and the FHFA ought to be representing us in making the changes. If anything, Freddie and Fannie's administrators ought to be receiving their own lawsuits. But I really think that we're going on, and nothing is changing. Ad nothing will change until there are consequences.
REHMConsequences such as, Wayne?
WAYNESuch as some of the people who are involved in this going to jail. Some of the companies who are...
REHMBut how is that going to benefit the taxpayers?
WAYNEIt will benefit the taxpayers by making it a little more risky for people to engage in this kind of activities.
SANDLERYes. Well, first, I'd want to point out that this whole discussion is about the past. It's about the blame game. How do we attribute blame and the economic cost of what already happened? Government is very good at solving the last problem. We have an economy that's absolutely in the tank. We have a housing market that is in abysmal shape.
SANDLERAnd as hard as it is to focus on the future when there are all of these difficulties in the past, part of this discussion and part of the way -- of government strategy needs to be focused on, how do we solve the problems?
SANDLERI think it's also important to point out, because we've been giving Fannie and Freddie a very rough time here, that both of those companies have new management that have been brought in to be part of the solution and really were not part of the problem, and...
REHMBut, you know, we're still talking about the banks. We're still talking about Fannie Mae and Freddie Mac, and we're not talking about the consumers. We're not talking about the people who bought those houses, who purchased those mortgages and what's going to happen to them. Are they, in any way, at any point, by virtue of any lawsuit or any negotiation, going to be made whole? Bill Cohan.
COHANWell, I think that one possible outcome -- and you're absolutely right, Diane. We have not -- you know, the strategy of the Bush administration first and then the Obama administration was to fix the top of the pyramid, and, hopefully, that would trickle down to the rest of the, you know, country. And it just hasn't worked out that way.
REHMIt hadn't worked.
COHANAnd not even close. And I think that one of the possible outcomes of this kind of lawsuit -- to say they collectively settle it for $5 billion or something and that money gets returned to the American taxpayer, a small down payment on the -- whatever it was $100-and-some billion that we've pumped into the Fannie and Freddie to save them, you know, I think that one way...
REHMAnd people still lose their houses.
COHANOne of the things that, I think, Phil had mentioned that is under consideration is this whole idea -- and Obama maybe will mention it on Thursday night. Let's hope he does -- this idea of giving people who are current on their mortgage payments a chance to refinance their mortgages at lower rates.
COHANAnd that'll be a direct benefit to consumers, this, you know, if -- another benefit to consumers will be if the mortgage-backed securities market gets back to normal functioning again. And getting Fannie and Freddie out of conservatorship, getting people more confident that these securities are not fraudulent, that, too, will benefit consumers because that'll result in lower mortgage rates, although they're rock bottom as it is now.
COHANI mean, there is so much work that needs to be done. And I think it's very, very important to look at the past, to remind ourselves what can happen here because, essentially, nothing has really changed on Wall Street. And that's one of the tragedies of this crisis.
REHMAll right. Let's go to Indianapolis. Good morning, Brenda.
BRENDAGood morning, Diane. Thanks for taking my call.
BRENDAI've listened with great interest. I spent some time working for Countrywide Homes. And there are a couple of points I wanted to tell you. Number one, they sent literature to loan originators, telling us that there is a -- what they called their exception desk so you could write loans, get loans approved that were exceptions or outside of the Fannie and Freddie rules, and that their top sales person in the company did about 80 percent or more of their business outside the rules.
BRENDASo I was wondering at that time where they packaged and sent all of those loans. And I suspect they're part of the failing loans that were slipped right in with all of the other good loans that went to Fannie and Freddie. And then another thing, with regard to how we can help people, you know, so many people that were put in loans that were beyond their ability to repay, had been moved out.
BRENDAAnd now we've got this glut of homes on the market that are going into (word?) disrepair, which can't be refinanced because they're almost, in many cases, uninhabitable. And it seems to me it was a bad opinion to put all of these people out of their homes so that -- I -- you know, because they couldn't pay on them.
BRENDAMaybe what we should do is put those folks back in if they still want their houses and let some of the lenders who had put those bad loans on eat some of the loss instead of the American public.
REHMThanks for your call, Brenda. And, Phil Mattingly, do you expect the president is going to say something about these mortgages and the people who have continued to pay, even though the banks want to foreclose?
MATTINGLYThe administration, I think, at this point, is very aware of the weight that the foreclosure problem, that housing -- the current housing market bears upon just the broader economy. Not sure, either way, right now, whether or not it's going to be mentioned in his speech on Thursday, but I think it's safe to say that it's going to be a focus from here on out.
MATTINGLYThey've tried programs right from the get-go of their administration. They tried the HAMP program. It's supposed to have $50 billion of TARP money. They were supposed to utilize to help the foreclosure issue. There have been programs in Congress. The administration has tried to revise programs. It's not that they haven't tried. It's just, so far, what they've attempted hasn't necessarily hooked.
MATTINGLYI think the mass refinancing that was mentioned is certainly an issue they're considering. It will be interesting to see in the weeks ahead what they actually settle on.
REHMAnd you're listening to "The Diane Rehm Show." Andy.
SANDLERDiane, this latest initiative of the administration -- focusing on the people we really ought to focus on first: borrowers who are struggling to stay current in their loans and can't refinance because their houses are worth less than their loans. This is the first time that the administration has really focused on this group. This is the place to start. They've got it right this time. How do they solve this problem?
SANDLERIronically, Fannie and Freddie, the plaintiffs in this lawsuit, and all of these defendants in this lawsuit need to be able to work together to figure out how to let these people, who are working hard to pay their mortgage every month, refinance. The other -- the next group we need to worry about are people who want to buy homes and have been responsible and are ready to purchase their first home. They can't get mortgage money.
SANDLERIt's very hard to get mortgage money, particularly for first-time home buyers. How do we solve that? We need Fannie and Freddie, the plaintiffs, and the bank defendants in this lawsuit to find a way to work together to make mortgage money available. This lawsuit really sets us back in being able to do those two very important things.
REHMBut, Bill, isn't there a potential conflict of interest here with FHFA, essentially suing the people that everybody has called their business partners?
COHANWell, I think -- you know, I think that happens all the time. I mean, that's what regulators do. They occasionally -- doesn't seem like often enough -- but occasionally have to sue the people who are in the industry that they're suppose to regulate. I mean, what's the difference between this suit and the SEC's suit of Goldman Sachs in, you know, in April of 2010 that they've settled in July of 2010?
REHMYeah, but nobody calls the SEC a business partner of the securities group. I haven't heard that said before.
COHANI think that they're -- frankly, they're more of a business partner than you would let on to think. There's not, like, a public company under their auspices, but, you know, the revolving door between the SEC and the regulators and Wall Street has been going on for a long time. And the regulations that are required to be written on the Dodd-Frank law require Wall Street's participation.
REHMAll right. We'll have to leave it at that. William Cohan is the author of "Money and Power: How Goldman Sachs Came to Rule the World." Adam (sic) Sandler is with Buckley Sandler law firm. Phil Mattingly is with Bloomberg News. Thank you all so much.
SANDLERThank you, Diane. Good to be with you.
REHMThank you. And thanks for listening, all. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth, Sarah Ashworth, Lisa Dunn and Nikki Jecks. The engineer is Tobey Schreiner. A.C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information.
Most Recent Shows
The Centers for Disease Control reported the number of Americans who died from heroin overdoses quadrupled in the decade ending in 2013. We look at what's behind the nation's surge in heroin addiction and what some communities are doing to fight back.
A writer explores his father's mysterious imprisonment, and accusations that he was spying for the CIA, in revolutionary-era Iran.
A lame duck, with diminished power to get anything done: This is how many had expected to describe President Barack Obama in his final two years in office. But Obama has had a string of recent victories, and now, he’s setting his sights on other issues. We look at the president's evolution and his political priorities for the remainder of his term.