Phil Angelides Interview- Financial Crisis Inquiry
Earlier this week I viewed the 4 part Front line series on Money, Power and Wall Street which screened last year on PBS. One of the source interviews for that series came from Phil Angelides who had a ringside seat to look very closely at the crisis.
Phil Angelides was chairman of the Financial Crisis Inquiry Commission, which was created by Congress in 2009 to investigate the causes of the crisis. In its report submitted in January 2011, the commission concluded that the crisis was avoidable, a result of excessive risk taking, failures of regulation and poorly prepared government leaders. This is the edited transcript of an interview conducted by producer Jim Gilmore on Jan. 4, 2012.
Right from the first question it is clear that the Inquiry was able to get to the heart of the crisis. Here is a transcript of the first question. The full video has been embedded below that and each question has a transcript attached.
“Phil, let’s start with the meltdown and the causes. What did you guys find to be the basic causes of the meltdown?
Well, at the heart of this crisis were really the twin factors of recklessness on Wall Street — unbridled, reckless actions — coupled with abject regulatory neglect in Washington, this brew of a private, financial sector run amok without the kind of guardians of the public interest on the watch, protecting our economy, protecting our financial system. And I think when you look at what happened, what’s most striking is the extent to which this was an avoidable crisis.
You know, there has been a whole school of rhetoric coming out of this crisis that it was the perfect storm, that this could not have been anticipated, that there were such large forces that collided that no human being could have foreseen the magnitude of what happened to our financial system and to our country. But when you look at the facts, what you will see is you will see a building over 30 years of a deregulatory mind-set in which the belief became embedded in intellectual circles and the financial circles that the financial masters on Wall Street had learned to control risk, that there was an intersection of their interest in self-preservation with the protection of the public interest, and there was a real belief in the light hand of regulation.
But in the early 2000s you see the emergence of lots of warning signs, red flags, flashing red and yellow lights along the way: the unsustainable rise in housing prices; the reports of egregious and predatory lending practices that were cropping up all over this country, starting in places like Cleveland and then spreading to the “sand states” [Arizona, California, Florida and Nevada].
What you see is, as early as 2004, the FBI is warning about an epidemic of mortgage fraud that, if left unchecked, could leave us with losses as big as the savings and loan crisis. You see the growing risk being taken by the big financial houses on Wall Street. Take, for example, Goldman Sachs. In 1997, I think they make about 39 percent or so, or in the high 30s of their revenue comes from what they call principal and trading, principal investment and trading.
By 2007 that has risen to about 79 percent, essentially making money just by trading on the marketplace. And of course you had that small matter of the doubling of mortgage debt in this country and the creation of $13 trillion of mortgage securities. All of that occurred as regulators either turned a blind eye or didn’t have a real sense of the risks that were embedded in this system that had grown in the last two to three decades.”
The absolutely incredible thing about all of these findings is that very little has been done to prevent this happening all again.
“Is there an irony in your mind that the fact that who Obama brings onboard as his economic team — [former Director of the National Economic Council Larry] Summers, [Chairman of the U.S. Commodity Futures Trading Commission Gary] Gensler is involved, Geithner — were all in the Clinton White House, were there during the later years when they decided to deregulate derivatives, that these are the people that he relies on?
One of the things that’s most striking is the extent to which in the wake of this crisis there hasn’t been a fundamental rethinking of our financial system and its role in our economy. If you look at the arc of what happened, from the 1980s, 1990s through the eve of the crisis, what you see is a financial system and sector that is more and more dominant in our economy, that’s taking more and more risks; in a sense, an economy that is more about money making money than capital being deployed to create goods and value and jobs for the American people.
In 1980, the financial sector represents 15 percent of the corporate profits in this country. By the mid-2000s, that has risen to over 30 percent. The amount of debt in the financial sector in 1978 is $3 trillion. By 2007 that soared to $36 trillion, very much an economy now being driven by the financial sector and by the risky practices it’s undertaking.
You would think in the wake of this crisis we’d have a rethinking fundamentally. And I think one of the things that’s most troubling is that here we are three years-plus after, and very little has changed. Now, Dodd-Frank [Wall Street Reform and Consumer Protection Act] has made a number of significant changes. But of course there is a fierce rearguard action by Wall Street, by its political allies, to inhibit its implementation. But here we are, three years later, and the over-the-counter derivatives market is still unregulated.
We don’t know today the risks that we have in this country from the euro zone crisis. It could be that banks in this country have $100 billion of risk. It could be that it has a trillion dollars of risk. In many respects nothing has really changed in the credit rating agencies. If you look across the board, very little has changed in the nature and operation of Wall Street, and I think that is one of the more stunning aspects of this episode.”
“The anger that grew on how the banks were dealt with, along with the amount of money being spent and everything else, came back to haunt the Obama administration. The midterms came about, and, I mean, what was the reality that they found themselves in?
Well, I think by 2010, of course, what people had seen was massive assistance to the financial sector. Yet at the same time, homeowners, people without jobs were left in many respects to fend for themselves. So, you know, there was anger that had built up, and that always accrues to the detriment of those that are in power. But I do think there was a golden opportunity lost in the wake of this crisis to bring in fresh ideas, a fresh team essentially, to examine what we had done over the last two decades and to talk about how we could reverse the damage and remake the economy so that we had a financial system that could support real growth in this country.
And, you know, it really is striking. Take a look, for just a minute, about what we did for banks and what we did for homeowners. Trillions of dollars going to the banks — 24 separate programs of financial assistance, TARP obviously being the crown jewel or the centerpiece of that program, $700 billion.
For homeowners, we had a series of anemic efforts to try to help people stay in their homes. Less than a million people have been helped by HAMP [Home Affordable Modification Program], which is the main program to help people modify their mortgages. So we are now in a place today where 11 million households owe more on their mortgages than their homes. The first wave of foreclosures in this country were in the people that got all those loans that probably never should have been made. The second wave happened when millions of people lost their job. And now the third wave that is happening are millions of people who are underwater so badly that they just know that there is no hope that they will ever have equity in their homes, and they are beginning to walk away. Those homeowners, those underwater homeowners, are underwater by about $700 billion, and not enough has been done to help them.
It’s striking that we did so much for the banks. Yet what we haven’t done is lowered the principal amount for homeowners so they could stay in their homes so we could restart the housing market. And it really is kind of a striking dichotomy between what the most powerful banks got and what tens of millions of homeowners got.”
There is a saying that when the US sneezes the world gets a cold.
Many of the same financial over trading that existed ( and still continues) in the U.S continues around the world. These positions will take decades to work through and will continue to affect credit and loans around the world.
We should learn from this and rebalance away from a few ungrateful financial mega banks and look to prevent history repeating but it doesn’t look we will.