The end of Wall Street as we knew it
TEXT OF INTERVIEW
Kai Ryssdal: Now that health care is done, Harry Reid seems to be ready to move on. The Senate majority leader said today he plans to bring a financial reform bill to a floor vote sometime next week. To really understand whether those changes might do any good in preventing crises to come, author Roger Lowenstein says it might be helpful to understand where we've been. His new book on how the crisis happened and where we go from here is called "The End of Wall Street." Roger, it's really good to have you with us.
Roger Lowenstein: Always a pleasure to be on the show.
Ryssdal: I'm going to try to sum up the basic thesis here of the first part of your book, which is going back to Fannie Mae and Freddie Mac and government regulations about housing and all this, we basically did it to ourselves. We wanted people in houses and arranged regulations and the mortgage market so that that would happen.
Lowenstein: Yeah, I think that's a large part of it. Every presidential administration has been a fan of owner-occupied housing. Fannie and Freddie obviously made it progressively easier to get a mortgage, but I don't want to leave out the notable contributions from the private sector people who, shall we say, worked so hard to distribute the mortgages that are now next to worthless.
Ryssdal: Yeah, but you know, so we had Robert Rubin, former Treasury secretary and a very high official at Citigroup, testifying on Capitol Hill the other day basically saying, hey, we didn't really know. We at the top levels had no idea any of this stuff was going on. You buy that?
Lowenstein: You know, whose job was it? I mean I know that Stan O'Neal had no, he ran Merrill Lynch, had no idea of their exposure to mortgage CDOs. When the mortgage market shut down, he asked his top executives, "So how much of this stuff do we own?" And they said, "Well, Mr. O'Neal we own $50 billion worth of it." And he knew then that the company was dead.
Ryssdal: Were they woefully out of touch? Were they sitting there with their fingers in their ears, do you think?
Lowenstein: You know, I think they were. They were out of touch with experience and the oldest lessons there are. Chuck Prince, of course the CEO of Citigroup, said famously in 2007, at some point the music is going to stop, but it's playing now, and as long as it plays, we gotta dance. Translation: We gotta keep buying this stuff, and putting it in our books, and issuing these securities as long as the market's hot. Well, Kai, any kid of six years old knows who's played musical chairs knows that when the music stops, not everybody gets a seat.
Ryssdal: One of the things we've learned out of this is that maybe not everybody ought to be in a house. That maybe not everybody ought to be able to get a mortgage and follow that part of the American Dream. But you raise a question or two about this idea of egalitarianism capitalism. Don't we want a capitalism in this country that provides opportunity for people?
Lowenstein: We want capitalism that provides opportunity, but what does that mean? Angelo Mozilo, the head of Countrywide, was beating the Hastings in the middle o, saying every American ought to get a mortgage. And he meant every American, even if you couldn't put any money down. When you have capitalism without capital, it's really not capitalism. I call him the Johnny Appleseed of mortgages because he was distributing them in every backyard. But if people don't have any stake in the loan they're getting, if they haven't put up anything, then it's the kind of capitalism that's a house of cards. It's hard to call it anything other than a truly disgraceful episode in American banking.
Ryssdal: Let me take you back to those months, actually, when Lehman Brothers was going under, the Dow was dropping 778 points in a day, and we really thought, everybody did, the end was coming to us, and that really Wall Street was not going to function the way it did anymore. And obviously that's sort of the premise of your book, "The End of Wall Street" it's called. But here we are, 18 months later, the Dow is at 11,000, banks are fattened and happy, investors are clearly feeling better, the recession is grinding to a close, is it really the end of Wall Street?
Lowenstein: I think it's the end of Wall Street as we knew it then. You know, Alan Greenspan said that derivative contracts set this in the late 90s, negotiated by private bankers, don't need to be regulated. I think it's going to be a long time before a Federal Reserve chairman says anything like that. The idea that bankers could set their own limits on debt, on capital, I think that's out the window. I think and hope Congress is going to be doing something about that in the weeks ahead. The idea that bad recessions were a thing of the past, that we had landed in some nirvana of forever smoothly sailing economic progress. I think we all realized that Wall Street is risky again, and economic life is risky again. Something in the same way that I think in a political sense the end of history ended with 911, we're in choppy waters again.
Ryssdal: Roger Lowenstein. His most recent book is called "The End of Wall Street." More from Roger tomorrow on the Marketplace Morning Report, what he thinks about financial regulation, and what's going on on Capitol Hill. Roger, thanks a lot for coming in.
Lowenstein: Kai, it was a real pleasure.