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Gretchen Morgenson has earned a Pulitzer-winning
career from exposing abuse and conflicts of interest on Wall Street. In this
interview, she confirms that there is indeed a second set of rules enjoyed by
our elite financial institutions, largely unfettered by the constraints that
apply to the rest of us.
Consequences for failure and fraud are very
different under this second set of rules -- in fact, they're practically
rewarded. Accountability, by all prudent measures, has become non-existent.
The extraordinary measures the U.S. deployed to deal with the great
contraction in 2008 only served to exacerbate these imbalances.
What's sorely needed now is a national dialogue on
whether we're willing to allow this to continue. What benefits are we
receiving by enabling these elite to enjoy such different standards? What
type of system and rules might work better for our interests?
Sadly, beyond the disorganized Occupy Wall Street
outrage that has waned in visibility, there is no real cogent, organized
public debate focused on this right now. A big reason is that Washington is
actively avoiding such a dialogue. It was fundamentally complicit in creating
the underlying factors resulting in the '08 collapse and it doesn't want
brighter light helping the public understand that more clearly.
As a populace we have a decision to make: Are we
going to get more engaged and start articulating the reform we want to see?
For if not, we're making a passive decision to allow the wealth gap to widen
further.
In the meantime, Gretchen sees a lot of instability
in financial markets that have been allowed to balloon further even though
the underlying causes of the '08 crash haven't been resolved. She cautions
investors to avoid risk (despite the Fed's encouragements), pay down debt,
and have a defensive plan in place should the markets suffer another serious
correction in the near future.
On the Two
Sets of Rules
Honestly, the transfer of wealth that
has been created, that has been taken from the saver -- and from the
taxpayer, do not forget -- 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, etc. They are
the ones who are really paying the price now.
I think that has led to a very angry
populace 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.
On the Lack
of Accountability
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 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
executives' pockets; they are paying it out of the shareholders' pockets. There really
is no accountability here whatsoever.
There were 1,100 criminal referrals in
the S&L crisis and there were 839 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
On the Need
for a National Dialogue
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.
On
Remaining Market Risk
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 $183 billion dollars. The fact that it was silent
on that issue is very, very important to remember. 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 leave us really vulnerable to
another episode like this in the future.
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Gretchen Morgenson ia one of the most well respected
financial editors and journalists of our time. 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. She is also a co-author of the recent
book: Reckless Endangerment: How Outsized Ambition,
Greed, and Corruption Led to Economic Armageddon.
Gretchen is assistant business and financial editor
and a columnist at the New York Times. She has covered the world financial
markets for the Times since May 1998 and won the Pulitzer Prize in 2002 for
her "trenchant and incisive" coverage of Wall Street.
Gretchen joined The Times as assistant business and
financial editor in May 1998. Previously, she was assistant managing editor at
Forbes magazine since rejoining the magazine in March 1996. Before that, she
was the press secretary for the Forbes for President campaign from September
1995 to March 1996.
From August 1993 to August 1995, she was the
executive editor at Worth magazine. As the number two editor, she oversaw all
financial coverage. She also wrote an investigative "Full
Disclosure" column monthly.
From November 1986 to August 1993, she was an
investigative business writer and editor at Forbes magazine. She broke the
story of anti-investor practices on the Nasdaq stock market that was followed
by Justice Department and SEC investigations. Earlier, she oversaw several
Forbes investing sections and their Washington bureau.
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