This is the transcript for the podcast Gretchen Morgenson: Wall Street Really Does Enjoy A Different Set of Rules Than The Rest of Us
Chris Martenson: Welcome to another PeakProsperity.com podcast. I am your host of course, Chris Martenson. Today we have the pleasure of speaking with one of the most well respected financial editors and journalists of our time, Gretchen Morgenson. Many of you know Gretchen from her Pulitzer Prize winning work at the New York Times in which she has written cutting exposes of the corrosive conflicts of interest on Wall Street as well as the reckless practices that led to the 2008 correction and its aftermath. I am looking forward to discussing with her how concerned we should still be about the stability of our financial system; what likely lies ahead and what solutions and safeguards a concerned society should be demanding most at this stage.
Gretchen it is a true honor to have you with us today.
Gretchen Morgenson: Well thank you for the invitation Chris, I am happy to be with you.
Chris Martenson: Well fantastic. You know to this observer, in 2008 the Federal Reserve and the Treasury Department scanned the wreckage of their failed policies and regulatory indifference and entered a form of triage. Only able to save one class of patient, they chose the big banks and other well-connected financial institutions and threw another class of patients under the bus. Those other patients represented savers and the prudent, retirees, pension funds, seemingly anyone who was prudent in perhaps knew how to defer gratification were asked to pay up in the form of negative real interest rates to help get the big banks, not only back in the black, but in a position to hand themselves record bonuses. At least that is how it appeared to me and continues to appear to me today. I think I represent a fair proportion of society. How do you see this?
Gretchen Morgenson: Well you could not have put it more succinctly Chris. Honestly the transfer of wealth that has been created, that has been taken from the saver and from the taxpayer to “mend the financial system” or to keep it from falling off the cliff is extraordinary. When you talked about savers, these are the people as you point out that really had nothing to do with the crisis. They were in fact, doing the right thing, not buying more house than they could afford, putting away money for college education, etcetera. They are the ones who are really paying the price now. I think that has led to a very angry populous but also a sense that there are two sets of rules in the country that one set applies to big and powerful institutions that when they go awry are rescued quickly. Then there is another set of rules for the rest of us who do what we are asked to do, do what we are supposed to do and really then become victims of the situation. It is very unfortunate and I think it is as you say corrosive.
Chris Martenson: You mention that there are different sets of financial rules apparently. I would like to talk about another set of apparently two sets of rules that exist. As I understand the Robo Signing scandal, forged signatures were applied to everything from loan applications to court affidavits. When I sign those documents there is a stern little boxed warning me under there that if I materially represent anything in that document it is considered fraud and subject to some pretty serious criminal penalties. Yet the recent mortgage agreement with the banks settled for, I do not know roughly twenty-five billion, seemingly removes criminal penalties entirely from the remedy. If a forged signature is not a material misrepresentation, I do not think anything can be. Is anyone at the top even slightly concerned that both the appearance and the even the application of the Rule of Law are vital components of our social fabric? Is this part of the conversation?
Gretchen Morgenson: It sure should be Chris. You again, really put it perfectly. The idea that forging signatures, that notarizing very important legal documents really improperly in thousands of cases, maybe millions. The idea that that is somehow is going to be allowed to go on with just sort of a penalty of some kind or a fine and not prosecuted in the criminal courts. I think it is amazing. It is really counter to what we have all been led to believe was the course of action in such a case. You have many small people, small fry mortgage fraudsters who are in jail. I mean we are talking about the people who were straw buyers for homes who defrauded banks. They are in jail for a reason because they perpetrated a fraud. These banks whose employees who were forging signatures should also have been prosecuted with vigor and they were not. They were simply allowed to negotiate their way out of trouble and negotiate their way with shareholders money. They are not paying it out of their own executive pockets; they are paying it out of the shareholders pockets. There really is no accountability here whatsoever Chris. I think that has just been a theme that has been very troubling to many people.
Chris Martenson: You know Gretchen, one thing that really caught me as well is if you do take a tour back through some of the prior settlements that have been negotiated often it is found that there is a pattern of what looks like an ironclad agreement, a settlement. It has money involved; it has certain actions that are agreed to be taken. The banks in many cases have been found to just sidestep those or ignore those and have to be re-sued or taken back to the courts in an attempt to get the remedy finally enforced. It is not just that we are allowing them to skate around some of it; it almost feels like they feel entitled to skate around every possible piece. There is no I do not know how I would put this, but there is no attending to the spear or the letter of the law in some cases.
Gretchen Morgenson: I agree and this is all done as you know in the framework of protecting the financial system. Many people are wondering why there have been so few criminal prosecutions of people who are centrally involved in the years leading up to the crisis. It is really quite an interesting question. You hear over and over again from those in positions of power whether they are regulators or prosecutors, we had to protect the financial system. Well if you are going to do that that is fine. Conduct the triage as you describe it during the years or moments when you must. Then you have to exact a price from the people who brought us to the cliff and almost over the edge. You cannot let them get away with this and expect them not to do it again in a few years in an even bigger way.
Chris Martenson: It has happened again and again and it seems to be more pervasive than ever. It is almost like if I look back through the history of financial crises they have just sort of grown increasingly larger and a little bit more abundant. As well though when we look all the way back to savings and loan crisis, what was it nineteen hundred people I think and many of them executives went to prison for their actions then. Today the number if it is not zero it is darn close at the executive level.
Gretchen Morgenson: Actually Chris the numbers are that we found in doing reporting on this very good, I think, comparison is that there were eleven hundred criminal referrals in the S&L crisis and there were eight hundred and thirty-nine convictions. That is a sizable number and far, far, far more than we have seen. I mean I think I can name one senior level person at a mortgage company who is in jail at the moment and that is Lee Farkus who was at Taylor, Bean and Whittaker, which is nobody’s idea of a household name company. It certainly was not at the center of the mortgage crisis.
Chris Martenson: How is it that this is occurring now? Is this sort of the natural endgame that happens when we have a system that begins to take care of its own? Is this just a function of the revolving door between regulatory bodies and the industries they are meant to regulate? How did we get to this point where so little interest and activity is happening in holding people accountable?
Gretchen Morgenson: I ask this of prosecutors whenever I meet them and they are as confounded as I am. I think the mentality among many of these people is that you do want to bring cases and you do want to have success and something to show for your years of effort. It really is the record is really dismal. I think you can only conclude that either there has been this sense that we had to save the financial system and therefore, put off doing anything until it was far too late to collect the material, the Statues of Limitations may have run on many of these crimes. Or some prosecutors have suggested to me that during the years leading up to the crisis the regulators were so inert and inept that they did not even collect the information that is needed to make cases after the fact. The regulatory failure it seems was twofold. It failed to reign in the practices in the years leading up to the crisis. Then by so doing, it failed in the aftermath by not being able to supply the information necessary to bring cases. It really is an extraordinary situation and the idea there is no penalty for these failures is again pretty discouraging.
Chris Martenson: Where does that leave us then? As I look back I think you have done one of the most outstanding jobs summarizing the various abuses and excesses that led up to the bursting of the mortgage market and the global economic chaos that resulted. Here we are several years later and to my assessment I think that we find many of the root causes have not been adequately if at all addressed. In some cases, the fundamentals of the system have only gotten worse. We have more debt today, derivatives are larger, imbalances seem to be there, and transparency is not quite where we were promised it might be. How much more or less care do you see things being today given the fact that we have allowed these transgressions, not only to transpire but also go unpunished if I could use that word. What are the concerns we should be aware of here?
Gretchen Morgenson: Again, I think you are dead on. The resolution to this crisis was supposed to be the Dodd Frank Legislation of 2010. Unfortunately, it was I think not even, close to what was needed to proscribe this kind of thing from happening. Again I think that first of all Dodd Frank did absolutely nothing about Fannie Mae and Freddie Mac. It was completely silent on those mortgage companies who were very central to the problems and are in to the taxpayer for a hundred and eighty three billion dollars. The fact that it was silent on that issue is very, very important to remember. We do not know, we have no resolution in place, no suggestion of one for either of those companies.
The second thing that I think is a big failing of Dodd Frank is that it did nothing about too big to fail institutions. That’s the powerful, politically interconnected financial institutions are not allowed to fail when they get in to trouble. If it had been me, I would have liked to have seen something that cuts these institutions down to a more manageable size and yet we did not force that on them at all. In fact, if you take a look at the assets at the top ten banks in the United States they are bigger; they are larger than they were before the crisis. Those are two elements that I think have absolutely not been dealt with that and leave us really vulnerable to another episode like this in the future.
Chris Martenson: I think what you are talking about then is that there is some failure of introspection here at some level to really stand back and ask the hard questions, what went wrong and why. At the macroeconomic level, I can summarize and I have summarized our global economic plate in just three words – too much debt. It was a very long multi-decade sort of expansion of credit, far faster than the underlying economy. As any family know when you take on debt faster than your income rises sooner or later you get in trouble. At the moment debt servicing is manageable for the U.S. but only barely and that is with interest rates at multigenerational lows. However when we include entitlement obligations not even a zero rate of interest can balance the books. We therefore find our options, if we peer into this, are limited to some form of default or printing. Do you come to the same conclusion and how do you see our situation playing out in the U.S. given what is happening politically?
Gretchen Morgenson: I think you are absolutely right that this was a crisis built on debt. For that very reason it is taking us way longer to get out of it than let us say a crisis built on internet stocks that were basically equities that people had made bets on. That was a large devastation of wealth when the internet bubble burst. It was by no means as devastating as this debt crisis because as you know the assets shrink in value but the debt that you carry took out to carry them does not. This is where you have people living in homes that are underwater that are worth less than the mortgage outstanding on them; people drowning in college education debt. So yes, we are in a really bad situation and with very slow income growth or slow job growth, you see how difficult it is to dig out. I think that is why we are in this long slow march out of the mess. It is very, very difficult to see how it is going to change any time soon.
Chris Martenson: In your recent book Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon that was co-written with Joshua Rosner, you wrote that “you felt compelled to write this book because we are angry that the American economy was almost wrecked by a crowd of self-interested, politically influential and arrogant people who have not been held accountable for their actions.” And that obviously stands true today of course I think MF Global sort of puts that into sharper relief than ever. At the same time, there are these structural issues which are caused by too much debt which are really, a lot of people are concerned about, but we do not know how to get traction on these because we are not actually having the discussion at the, what I will call the national debate level yet. It is certainly happening very vigorously in books, between individuals, on the internet, on blogs. It is happening all over the place, but kind of at the margins. What will it take to push this to the center? Does this require a crisis or can we get there on our own terms?
Gretchen Morgenson: Chris I am shocked that it has not led to a really honest dialogue already, this crisis because it was so large and so devastating and it hurt so many people that I thought wow this is really it. This is going to force the issue to be brought in to the open, to be discussed intelligently and to be resolved. It just has not been. I mean I lay it at the feet of Washington because I think they were crucially involved in the crisis in the years leading up to it. There is a reason why they do not want to deal with it. There is a reason why they do not want vigorous investigations because it could very well lead back to an understanding that they were major contributors to the crisis. You have this weird disconnect where the populace at large, many people are angry and concerned and discussing and dialoguing as you say on the internet and in coffee shops. Washington – it just rings hollow for them. They just do not want to address it. This is the failure I spoke of earlier about how no dealing with Fannie Mae and Freddie Mac. No resolution for the big banks that are too big to fail. It is a deep, I think, dysfunction in Washington that may be a result of their understanding of how deeply involved they were in laying the groundwork for the crisis.
Chris Martenson: It would be fair then for a prudent adult who is fairly rational to peer in to the systems, see its dysfunction, understand some of the risks that are then unaddressed, maybe even mounting in some cases and come to the conclusion that waiting for Washington to see the light and ride to the rescue is maybe not the most dominant strategy in their lives.
Gretchen Morgenson: I think they will be waiting a long time. I just do not see it happening. Even in an election year, we are not having these important conversations. As you said what is it going to take. Well I was shocked that a crisis of this size did not generate that discussion already.
Chris Martenson: Here we are, what would you advise say individual citizens to do in this particular landscape. Do you have any particular views on investing or just let us say return of capital rather than return on. How does one navigate this landscape?
Gretchen Morgenson: It is very difficult for people to not go out on the risk horizon to gain the kind of income that they are used to getting. Even on Treasury Securities for that matter relatively risk free. It is really an excruciating difficult time for people especially those living on fixed incomes, but also those who are saving for retirement. Again I would just say do not take risks, even though the Federal Reserve is essentially encouraging you to do so, we know how that can end, it can end badly. I think that is a pursuit that must be maintained at the ‘be safe not sorry’. Also pay down debt to the degree that you can because that would protect people from being hurt and being put in the situation where they really in vise and cannot get out.
Chris Martenson: I think that is very sage advice and it is advice that I have been promoting myself for a while. This is all the time we have today. I would encourage everyone to pick up a copy of Reckless Endangerment because knowing where we are and how our current system is dysfunctional is an important edge and because it is a very good read. Gretchen thank you for your time and insights today.
Gretchen Morgenson: Well thank you Chris I really enjoyed myself.
Scales of justice image via shutterstock. Reproduced on Resilience.org with permission.