SN&R talks to Angelides about the financial crisis
Congress put Sacramento’s Phil Angelides in charge of getting to the truth about the 2008 financial meltdown. What’d he find?
Longtime Sacramentan Phil Angelides was appointed by Congress to lead an investigation into the financial meltdown of 2008—the worst global monetary crisis since 1929. Eighteen months later, the former California state treasurer and his Financial Crisis Inquiry Commission completed work.
The commission’s major finding? Human error caused the crisis; the whole disaster could have been avoided. SN&R’s Jeff vonKaenel spoke last week to Angelides about what caused the meltdown and what’s in place (or not) to prevent it from ever happening again.
Jeff vonKaenel: Congress appointed you to find out why, in 2008, we suffered the worst global financial crisis since the 1930s. And your book with the results has just been released. You must have really been through a harsh test these last 18 months.
Phil Angelides: Well, I’m anxious to come home, Jeff. I really am. Washington, D.C., is a tough town, you know. But it’s been a fascinating experience. We’ve had a chance to look at what was a disaster for our country, and we’ve done it in the face of some pretty tough odds, the very powerful financial industry, you know, and regulators. It’s been hard to get people to step forward and really come clean about what went wrong. It’s been a very tough and challenging year, but I’m glad I did it. I’ll look back on it with pride.
Well, I read the summaries, and they’re very impressive. I just got the book last night.
Well, there are a lot of people on Wall Street or in Washington who want to wipe this away from memory. There’s already a revisionist effort. So I believe one of the most important things we’ve done in this book is catalog what actually happened. And it’s based on real evidence, millions of pages of documents, many which have never been seen before, over 700 witness interviews, 19 days of public hearings around the country. It was exhaustive, but I do not believe that the nation’s examination of this calamity should stop. So go ahead, you want to ask me a couple of things.
What are the major takeaways that you’ve gotten from your 18-month investigation?
Well, first and biggest is that the crisis was avoidable. There’s a narrative that emanated out of Wall Street that this was a perfect storm, an unfortunate confluence of events. But our major conclusion was that it was a result of human action, inaction and misjudgments. And the greatest tragedy would be to accept the refrain that no one could have seen it coming, and thus nothing could have been done. If we accept that notion, it will happen again in the very near future.
What we catalog in this book is that all the warning signs were there: the explosion in egregious predatory lending, the exponential growth in out-of-control subprime lending, the growth of the shadow-banking market—you know, the very lightly regulated banking sector that grew to be bigger that our regulated banking sector in this country—the deregulation of derivatives in 2000 that opened up this huge financial market with no oversight, no transparency. And there were lots of warning signs along the way—as far back as the 1990s, community groups were complaining about predatory lending. In 2004, the FBI warned about an epidemic of mortgage fraud, saying that if it went unchecked it would result in a crisis as big as the [savings and loan crisis of the ’80s and ’90s]. They repeated those warnings in 2005. There were lots of red flags, lots of stop signs, but people just kept fumbling along. And we were let down by the regulators of this country who were asleep at the switch. We were also let down by the leadership of major financial corporations who took enormous risk that ultimately turned into a bill for the American taxpayer.
It seems the majority on the commission, the Democrats, thought ‘we’ve had 30 years of deregulation and the greedy sons of bitches were just making up their own rules.’ And the minority on the commission, the Republicans, basically thought ‘shit happens,’ but since the crisis happened all over the world, nothing about deregulation was really the cause of this.
Well, so, first of all, it didn’t happen all over the world in the same way. For example, Canada had a rise in housing prices, but they haven’t had nearly the kind of financial disaster or housing declines that we have had here. There were housing bubbles in other countries, but they didn’t spill over in the same way. And, I might add, a lot of Europeans had problems because they bought a lot of the toxic mortgages that were produced here in the United States. But beyond that I think this is the major point of divide—we do not believe that we should just consign our self to a fate that every few decades we’re going to see a disaster that leaves tens of millions of people unemployed, millions of people losing their homes and trillions of dollars of wealth vanishing for working people.
We don’t think you can repeal the business cycle, but we do believe if you had reasonable regulation with regulators with political will and backbone who could curb the excesses in the marketplace, and if you had responsible corporate leadership, we need not have arrived at this point. And I want to say it was a duel phenomenon that happened over the last 30 years; it was just not just a belief in deregulation, but it was also that there was this faith embraced by many people that the Wall Street firms had learned to master risk, somehow they could produce big profits and big returns with very little risk. So it was really the dual combination of a failure of regulation at the same time that we said we’re going to rely on these corporations because they have an interest in their own self-preservation. And of course, they ran themselves over the cliff.
One of the things you mentioned in your report was the $2.7 billion of federal lobbying money and the $1 billion in campaign contributions. To what extent does that set up a scenario with so much concentrated political donations that it’s basically political suicide for politicians to oppose the financial institutions?
Well, there’s clearly an enormous amount of wealth and power in that industry, whether they gave campaign contributions or lobbying money. But obviously their power, the effort they put into the lobbying made a difference. If you look at the history of this crisis, really the seeds of it get sown in the ’80s and ’90s. There were a series of changes in law and regulation pushed by the industry at every turn. Now, I will say last year that Congress made major progress with the passage of the Dodd-Frank bill that began to reverse the trend and that has some very significant provisions. And that was done by Nancy Pelosi, Barney Frank, Chris Dodd, who were able to pass that legislation over the face of enormous lobbying pressure. Three thousand lobbyists swarmed the Hill to try to kill that bill! So at the end of the day, interests with wealth and power in this country are going to exercise that. But the real question is whether we will have policy makers and regulators with backbone. So I want to say I think it went beyond the money.
So if a politician voiced an opposition point of view, and some did, there was a real risk of them being beat down by an opponent financed by the financial industry. Doesn’t that kind of weaken the ability to have a real discussion?
Absolutely. There’s a chilling effect. One of our commissioners, Brooksley Born, she’s the classic case. Brooksley Born was appointed by [President Bill] Clinton in 1996 to head the Commodity Futures Trading Commission. She was one of our 10 commissioners. From 1994 to 1996 or 1997, there were a series of scandals involving the highly risky use of the over-the-counter derivatives; these are the ones not traded on the Chicago Board of Trade and the commodity exchanges. There was a big scandal at Procter & Gamble with Sumitomo Bank. So Brooksley Born, as chair of that commission, stepped forth and said, “I think we ought to discuss whether these over-the-counter derivatives”—which ultimately grew to this multitrillion-dollar industry by the time of the crisis—“should be regulated.” She put out a concept paper to discuss it.
Well, she was immediately shut down by the powers that be. It was [former Chairman of the Federal Reserve] Alan Greenspan, it was [former Secretary of Treasury] Robert Rubin, it was [former Securities and Exchange Commission Chairman] Arthur Levitt, it was [former Secretary of Treasury] Larry Summers and it was the financial industry. And they essentially put a stop, they went to Congress and said that Congress ought to adopt a moratorium on any regulation—and then two years later, they got a complete ban on regulation. So this is an example where someone stood up, said the right thing and was put down for it. But this should be a constant source of concern, because also more and more power is concentrated in fewer and fewer banks. Between 1990 and 2005, I believe the top 10 banks in the country, their share of assets grew from 25 percent to 55 percent. After the crisis now, we have fewer big banks, because Lehman [Brothers] went under, Bear Sterns went under, Merrill Lynch merged with Bank of America. The concentration of power by fewer banks is even greater today.
I know that your job was to report on what happened without making policy recommendations. But if we made you financial czar of the country, and we could put the Phil Angelides plan into place—what would you do?
Well, I mean, in big strokes, I would say the following—there is no substitute for regulators who have the political will, the political backing and the backbone, to clamp down on excesses when they see them. I’ll just tell you that. You can legislate power, but before this crisis, the SEC had a lot of power and they did nothing. The Federal Reserve had all the power in the world, and they were the one entity that could have controlled mortgage-lending standards, and they failed to act. The Federal Reserve of New York and the Office of the Comptroller of the Currency had, again, plenty of power to crack down on excesses in the marketplace and did not.
So, I think, first of all, a vigilant public and vigilant regulators are needed. But I also think that there needs to be a change in culture in this country in a sense that what we also saw was financial companies creating financial products, essentially toxic mortgages that they created, packaged, sold throughout the world without examining what they were or caring to know what they were. Or they knew that they were defective and kept selling them anyway. You know, in the wake of the S&L crisis, there were about 1,000 convictions of S&L executives. In the wake of this crisis, there has been very little in the way of prosecutorial activity.
If a person on the street writes a bad check for the rent or for their food, they’re going to go to jail. But the wrongdoers in this scandal face no consequences …
Very little consequences. Let me give you this one example which is, and we cite these in our book, Citigroup. … There are certain requirements that corporations provide timely and accurate information for investors. And all through 2007, Citigroup was telling the investing public, including its shareholders, that it had $13 billion in exposure to subprime mortgages. As it turns out, and while the management didn’t know it, they had $55 billion in them. But even after the management finds this out, on the very day that the board of directors is learning that it has $55 billion worth of exposure to subprime mortgages, on that same day, Citigroup is still telling the investing public they only have $13 billion. Now, they get charged by the SEC, and SEC in the end, I think, levied a fine on their chief financial officer, but the initial settlement was something like a $100,000 fine on the chief financial officer who made $7 million that year. And I think they levied a $75,000 fine, I think, on the deputy who was making $3 million—and the balance of the penalty was paid by the corporation, i.e., the shareholders. So very little consequence. And remember when Goldman [Sachs] was fined $500 million? Their stock, I believe, went up so much that day because there was now certainty about their liability—I think their stock went up over $2 billion that day. So there’s been very little consequence to the financial industry.
Does the fact that the Republicans issued dissenting opinions weaken your findings?
What’s powerful about our book is that we tell the truth. A week or two weeks off after it’s been released, we expected the financial industry and all their lawyers to have looked at every word and found mistakes. But while the Republican dissent differed with us on why the crisis happened, our account of the crisis and what occurred stands is undisputed, and I’m very proud of that.
In terms of making sure that this doesn’t happen again—from the outside, it looks like only relatively minor reforms have occurred …
I wouldn’t characterize them as minor. I mean, in the Dodd-Frank legislation, there were some pretty significant reforms, into the derivatives market, other reforms on capital that the banks have to hold. I think a strong place to start is to make sure the reforms have been put into place and are vigorously implemented.
If we put back in more of the regulatory structure that was there pre-1980, is that enough?
Well, the world’s changed—the world’s changed enormously—so you really can’t have a 1930s again. One thing people don’t realize is that this big shadow-banking system grew up. You know, we had our traditional regulated banking system, but by the beginning of 2008, the regular banking system had about $11 trillion in assets. What I call a lightly regulated or unregulated shadow-banking system had $13 trillion in assets. What happened in 2008 was that there was a run on that system, because it didn’t have the regulatory protections, or, like, the [Federal Deposit Insurance Corp.] insurance protections that we put in after the Great Depression. So we almost ended up with a 21st-century financial system with 19th-century safeguards. We’ve got to update those safeguards.
Speaking as a guy who doesn’t own a bank, it’s annoying to hear from people, after they’ve messed up as badly as they have, moaning about not getting their million-dollar bonuses …
The question about whether the lessons have been learned is very much open. But what’s really surprised us is—this last weekend, we were on the Washington Post best-seller list, the fifth highest nonfiction paperback! I think it’s a reflection that we’ve written something that’s readable, but I think Americans still want to know: How did this happen?