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September 19, 2008
BILL MOYERS: Welcome to the JOURNAL. The news this week drove us to pull THE GREAT GATSBY off the bookshelf and read what F. Scott Fitzgerald wrote of his protagonists, the Buchanans: "They were careless people, Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made."
TREASURY SECRETARY HENRY PAULSON: We must now take further, decisive action to fundamentally and comprehensively address the root causes of our financial system’s stresses.
BILL MOYERS: The news caught everyone off guard, including my colleagues and me. For technical reasons we had to record our broadcast last night, with guests who have a deep understanding of the big picture. We decided to go on with the broadcast even as the news continued to pile up, because of the light our guests shed on the roots of the crisis.
Gretchen Morgenson writes the MarketWatch column for the Sunday NEW YORK TIMES.
Floyd Norris is the paper’s chief financial correspondent.
Welcome to the JOURNAL.
FLOYD NORRIS: Thank you.
BILL MOYERS: You both have been at this a long time. Is this the biggest story like this that you’ve both covered in your long careers?
GRETCHEN MORGENSON: I think this is the biggest story in eighty years. This could be the biggest story since the Depression. And I know I’m not allowed to say the "D" word, because that makes everybody really afraid. But this is the single, you know, most traumatic financial crisis I’ve ever seen.
BILL MOYERS: How so? Why? What’s at stake?
GRETCHEN MORGENSON: Because it affects everyone. It is now possibly bleeding into the economy. We’ve had a fairly strong economy up until now, which has been a godsend, while this incredible turmoil is taking place. If banks are stopping lending, which they appear to be doing, then that’s going to affect the economy, to make the downturn. So it is affecting everyone.
There was a lack of accountability where a banker didn’t care whether the loan was repaid. And the Wall Street firm that sold the securitization trust didn’t care if it ever got paid back, because they were happy with their commission. The broker making the loan didn’t care, because he got, all the way up the ladder to the CEOs of these companies, who are allowed to walk away from a financial cataclysm with huge payments.
BILL MOYERS: Should they be required to return the loot?
GRETCHEN MORGENSON: Yes. Why not? Claw that back. But does anybody ask for that? No.
BILL MOYERS: You were here a year and a half ago. Remember that? But did you have clues then that this whole thing was going to become unraveled?
GRETCHEN MORGENSON: The problem is that this is a de-leveraging. What we’re going through now is we have to eliminate all the debt that has been amassed by not only the consumers with their credit cards, their mortgages, et cetera, their car loans, but also major corporations and Wall Street firms who were leveraging themselves, borrowing money to make their speculative bets. And now, those bets have gone bad, and they have to pay those debts back. You see, the assets shrink, but the debt doesn’t. And so, you have to pay that debt back. And that’s a difficult thing to do.
But we still, the AIG bailout proves that we don’t know how bad things are at these firms. The idea that AIG could fail over a weekend, and where the government can’t go through its books in an orderly fashion to see what it’s worth, but just has to throw money at it to make the problem go away, tells you we’re not anywhere near this.
BILL MOYERS: Well, AIG and Lehman, they kept assuring investors everything was all right, assuring the public everything was all right. Were they lying?
FLOYD NORRIS: Well, I’m sure they believed it.
BILL MOYERS: You really think they did?
FLOYD NORRIS: I believe Lehman believed it. Lehman, consistently during this, has believed that the bottom was upon us.
So they were buying as this started down last year, taking advantage of what they believed to be a temporary ridiculous decline. And they never quite realized that they were wrong. The prices on many of these assets now probably are ridiculously low. But buying them on heavy leverage is risking if you’re a little wrong, you can die. And that’s what happened to Lehman.
GRETCHEN MORGENSON: Well, the problem is that now, everything in our financial markets is super-interconnected. And so, one failure has the potential to push over other dominos.
BILL MOYERS: But why AIG and not Lehman?
GRETCHEN MORGENSON: Because AIG was so enormous, it’s almost a paradox. It’s almost perverse. Lehman was not big enough in the derivatives market.
That has counterparties, where if you fail, then they might then push over another domino. Lehman was not large enough in those areas. AIG was enormous. AIG had those derivatives from European banks, which may have failed. And so, you see, it’s a worldwide problem.
FLOYD NORRIS: To let AIG go under now would have created an awful lot of problems for an awful lot of other institutions. And the government doesn’t have any way to know exactly who and how much. And they were scared. And they probably were right to be scared.
BILL MOYERS: Let me ask you about one telling anecdote, at least, telling to me. The Secretary of the Treasury, Paulson, calls the CEO of AIG and says, "You’ve got to go. Pack your bags and leave." That’s usually a decision for a board of directors.
GRETCHEN MORGENSON: Well, you see, the problem is the government owns it now. With the $85 billion loan, they have taken over eighty percent of the company.
BILL MOYERS: They nationalized.
GRETCHEN MORGENSON: Okay. It’s been nationalized.
So Paulson is the new chairman of the board. And he’s saying you’re gone, you’re gone.
BILL MOYERS: You called this on your blog yesterday, "21st century socialism."
FLOYD NORRIS: That’s right.
BILL MOYERS: How so?
FLOYD NORRIS: The government is nationalizing companies. They nationalized Fannie Mae and Freddie Mac. And that made a little bit of sense, since we’d always thought Fannie Mae and Freddie Mac had an implicit government guarantee, whatever that meant. And now they’ve nationalized AIG. They own eighty percent of the company. They have lent money to the company at very strict terms.
For this company to somehow pay that loan back will require amazing competence in managing things. And I don’t think anybody expects them to ever do that. They’re probably going to liquidate AIG. It amazes me. I’m not sure it was unnecessary, as I said. But I can only envision what the right wing would be saying if a liberal Democrat had decided to nationalize the biggest insurance company in America. I don’t think you’d be hearing a lot of praise for it.
GRETCHEN MORGENSON: The ugly thing about this is this is privatizing gains and socializing losses. So when things are going well, the managements make out, the shareholders make out, the counterparties are fine. All the private sector people do well. But when something goes wrong, when decisions are made that turn out to be bad decisions, the U.S. taxpayer has to take on the problem.
And there’s something very wrong about that. Because all of those people that made all that money are running off here into the distance with the money, carrying it in their bags. And the United States taxpayer is on the hook.
FLOYD NORRIS: But there’s another aspect of that, which is the biggest risks were taken in the derivatives markets, and in the markets, what I call the shadow financial system. This is a completely unregulated financial system that grew up aside our fairly heavily regulated financial system. And the government decided it would not pay any attention to it, there was no need for regulation. Alan Greenspan was very adamant on that. He believed that the derivatives they were trading would shift the risk away from the banks he was supervising, and to institutions which could better withstand it.
But he had no facts to prove that. And it turns out a lot of it ended up at the banks, which is why the banks are in trouble. And a lot of it ended up other places. And the ability to shift the risk meant that more risk was taken.
BILL MOYERS: Here’s what I don’t understand about AIG. Now, you say it’s been nationalized. And the company agreed to be nationalized, in effect, because it didn’t have the cash that it needed, right? Didn’t have the cash.
FLOYD NORRIS: Right.
BILL MOYERS: So it had to go to the government. Well, why were there no banks, or no group of banks that had the cash for AIG? Why did they have to come to you and me and the other taxpayers?
GRETCHEN MORGENSON: Well, right about now, banks are also in a very difficult spot with their capital. They, too, have absorbed enormous losses from mortgage-related securities, commercial real estate. They, too, are facing capital crunches. And so, they need to shore up their capital base themselves.
FLOYD NORRIS: But I think they could have done it if they’d had confidence that AIG was a good candidate for a bailout.
BILL MOYERS: And why didn’t they have that confidence?
FLOYD NORRIS: Apparently, when they went through the books.
BILL MOYERS: They, the government? The banks?
FLOYD NORRIS: Both.
BILL MOYERS: How does this compare to the last big scandal like this, in which, after the savings and loan industry imploded, the taxpayer had to come riding to the rescue with billions of dollars to clean up the mess. Is this in any way comparable to that?
GRETCHEN MORGENSON: This is worse than that I think, Bill. Because, for instance, it’s way more complicated. The S&L crisis was largely commercial real estate, and also multi-family homes. This crisis right now is single homes, one by one by one by one. Very difficult to buy up all those assets and then sell, them, and besides which, it is monumentally bigger.
FLOYD NORRIS: But one of the interesting things that’s going to be happening is the government now is going to have to decide for an awful lot of homeowners, do we kick you out of your house? Fannie and Freddie have guaranteed, and therefore, effectively own, many, many billion dollars worth of mortgages.
GRETCHEN MORGENSON: Trillions.
FLOYD NORRIS: Trillions, yes. And it will be up to them to decide, do we restructure this mortgage, do we give you a concession, or do we tell you to go away? The FDIC, which has taken over IndyMac, which was a large, irresponsible lender, is making those decisions right now on mortgages issued by IndyMac that IndyMac still owned.
So, yeah, it’s similar to the S&L crisis. It’s also similar, the S&L crisis, of course, became immensely larger because the government, principally the Congress, found ways to postpone it. They changed rules of accounting so that people wouldn’t have to recognize losses, and they could earn their way out of the situation. Well, you know, surprise. They simply lost their way into a bigger problem.
And there is a great temptation to do that now. We’re seeing lots of pressure to relax accounting rules for banks, so they won’t have to ‘fess up, that they’re underwater. And maybe, somehow, they’ll be above water if we give them some time. And maybe they will be, and maybe there will be a little farther under.
BILL MOYERS: I don’t know two reporters who’ve tried harder to understand this. But let me ask you to take off your journalist hat for a moment. You both obviously have some pension or retirement plan at the NEW YORK TIMES. Are you scared?
GRETCHEN MORGENSON: I’m very, I’m actually sick about it. I wouldn’t say I’m scared. But I’m kind of distraught at it, just because, not for myself, but for all the people out there who worked very hard, worked two jobs, trying to make ends meet, wanted to buy a house, got ripped off by some lender. I mean, you know, call me a bleeding heart. But I’m sorry. These people didn’t understand what they were up against.
FLOYD NORRIS: You know, one of the trends over my lifetime is that people have been forced to take more and more risk. The, when I was young, most people had pension plans that worked. They, of course, had Social Security. Those pension plans said, we’ll pay you so many dollars a month.
Those kind of pension plans are vanishing. Instead, people were forced into 401ks. And they had to decide what investments to make. So we are more dependent on the state of the financial markets, this generation is, than most of our parents ever could dream of being.
BILL MOYERS: Are you scared?
FLOYD NORRIS: I’m worried, yes. This is completely unprecedented in my lifetime. I’m fascinated. Things have happened that I didn’t see coming and would have dismissed as unlikely. It was only a few months ago that I had Wall Street CEOs complaining to me that their stock prices were so low because the press was mean to them, and we didn’t appreciate what wonderful business strategies they had. And, you know, if they were cheap then, boy, they’re cheap now.
I’m worried about it. At the moment, Secretary Paulson is clearly scrambling. But that’s to be expected.
You know, we don’t fix the roof during the hurricane. We just try to deal with the winds. And once it’s over, we can discuss how the roof should be built.
BILL MOYERS: Next Friday night is the first debate between the presidential candidates. Think a moment, and if you had the option to ask the first question on this issue, what would you ask?
GRETCHEN MORGENSON: I’d like to know just what John McCain has in mind when he talks about reforming Wall Street. Because I think those are very easy words to throw out there, and people might respond to them. Because, of course, we all know that there is something broken and there is something that needs reforming. But just exactly how is he going do that?
FLOYD NORRIS: I’d like to hear the same thing. I would hope the candidates would avoid the easy denunciations of the greedy, rich Wall Streeters who are destroying the country, which we’ve heard from both of them. Because that doesn’t tell anything about what you’re going to do about it.
BILL MOYERS: Neither Obama nor McCain have any real economic experience. And both are now talking like reformers. "Let’s reform Wall Street," McCain said this week, after 24 hours earlier, saying that he didn’t think the taxpayers should bail out AIG. He changed his mind. Obama has been looking for that populist voice that he had back in March of this year, before he got the nomination, when he was talking about Wall Street greed. But both of them are now talking about reform. What’s the first thing that either one of them could do as president, if elected, that would convince you hard-boiled reporters who have been studying this a lot longer than the presidential or vice-presidential candidates, what’s the first thing they could do to convince you that they’re serious about this?
GRETCHEN MORGENSON: I would like to see them put some very tough cops on the beat at the SEC, the Securities and Exchange Commission, in the bank regulatory units. I would like to see, and I don’t care if they come from, you know, government. I want to see them with a CV that looks like they’re willing to take on the status quo and stand up to pressure and power.
FLOYD NORRIS: One of the interesting things is that you’ve had people at any number of government agencies in recent years, who did not believe in the function of the government agency. And you know, I agree with Gretchen. They need to put in some people who will be vigilant. They also need to put in some people who are smart enough to avoid the simple clichés of economics.
BILL MOYERS: Do you think it’s true that this crisis today is the result of a sustained ideological push, to let the markets do what they want and get the government out of the way?
GRETCHEN MORGENSON: I think that the free market idea, the free market sort of constant mantra that it would bail everybody out, or it would operate in such a smooth fashion you don’t need the government, was absolutely behind, you know, the last ten to fifteen years of what we’ve seen. And I think that we now seriously need to question that. And I’m very glad that if this crisis does anything, it will question that. In fact I feel like we’re kind of lurching from problem to problem, lurching from bailout to bailout. I just feel we’re shooting from the hip.
BILL MOYERS: Floyd Norris and Gretchen Morgenson, thank you so much for being with me on the Journal and talking about these issues.
FLOYD NORRIS: Thank you.
GRETCHEN MORGENSON: Thanks, Bill.
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