We are finally seeing signs that the government or part of it is starting to crack down on banks that are still profiting off the crisis. Over the last few weeks, Attorney General Eric Schneiderman has reportedly opened a probe and requested information from Wall Street banks about their mortgage security operations during the credit boom. He specifically requested meetings with representatives from Bank of America, Goldman Sachs, and Morgan Stanley. The investigation has not yesterday been made public, but the probe has been expanded to include JP Morgan Chase, UBS, and Deutsche Bank. All right. You go get them, Eric. The inquiry appears to be quite broad. He has requested mortgage-related documents and could be looking into fraud, God bless his heart. Can he pull off this investigation that the rest of the government seems wildly disinterested in? I hope so. Or are they simply too big to jail? Let me bring in Pulitzer Prize-winning columnest and editor for the New York Times, Gretchen Morgenson author of “Reckless Endangerment.”
Thanks for having me.
First there’s a theory out there that it wasn’t the banks fault but the government: they forced the bankers to make these risky loans, to minorities and poor people, and the banks didn’t want to do it, but they just got forced into it. Is there any truth in that?
It’s so interesting that there’s so much blame to go around in this whole crisis. As you know, anything that could achieve trillions in losses really cannot be just a few people at the wheel here, but really what these lenders did, as we are finding out more and more, even four years after the crisis erupted, they actually targeted minorities and targeted first-time home buyers, people who are unsophisticated, with some of the most poisonous mortgages you can imagine, mortgages with low interest rates that would explode or balloon higher, really mortgages that were very different for even the most sophisticated even higher net worth individuals to pay, so it really wasn’t that they were forced to do it, these were very lucrative loans.
Yeah, no question about it, of course, nobody made them make billions of dollars, but I think a lot of people wonder, why is making these risky loans more profitable for them?
You know, it really is true, the more poisonous the loan, let’s say there’s a prepayment penalty associated with it. If you’re a borrower that has a bit dicier credit, you have to pay a higher rate of interest. These are all elements that go into the profitability of a loan. So the loans that were given to people that were maybe on the lower rungs or who never had a home before or no credit, they really paid through the nose.
Now, they got crushed by that, right? There’s another set of victims. All these mortgages would get wrapped up into the securities, that then the big banks would sell off to the clients.
But meanwhile, they were betting against their clients. If they were betting against their clients making good on these loans, isn’t that fraud?
Some were betting against their clients. They argue it was not fraud, because they disclosed they were making bets or disclosed that they were making bets. Now, that is their argument. What you have to think of as an everyday person, is that the kind of investment bank I want to buy products from, where they’re betting against me, and I, you know, really would have to say no, I think those are the kinds of practices that normal, everyday people would find questionable.
So how have they been getting away with this for all this time? Obviously the collapse happened in 2008. Finally Eric Schneiderman appears to be going after them right now. Why hasn’t the federal government been doing anything?
I think it’s important to remember that the regulators who were really charged with watching over these markets in the buildup to the boom, i.e. 2003, ’04, ’05, ’06, were asleep at the switch, not really doing their jobs. What that ended up doing is not only did it not protect people during the boom, it also meant there were very few facts, figures and less data than ever to bring cases now. So it’s a double failure that’s really, really problematic.
Look, I think realistically those banks give a lot of money to those politicians. One last real quick question for you, Gretchen, is this thing fixed at all, or will it blow again?
We did have the Dodd/Frank law to try to fix some of the problems, but my feeling is that it did not fix the biggest problem, which is that we have large politically connected institutions that will not be allowed to fail.
Yeah, that’s a huge, huge problem. Gretchen Morgenson, thank you for joining us.