Lessons from the Crisis: Ask the Chairman

Thursday, February 24, 2011

Phil Angelides, chair of the Financial Crisis Inquiry Commission (Chip Somodevilla/Getty/Getty)

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on The Brian Lehrer Show, Phil Angelides, Financial Crisis Inquiry Commission chairman, continued to unpack the Financial Crisis Inquiry Commission findings on the reasons behind the economic meltdown.

Phil Angelides, Financial Crisis Inquiry Commission chairman, is a weekly guest on The Brian Lehrer Show for the month of February. This week he continued to explain the Financial Crisis Inquiry Commission findings on the economic meltdown by looking at the Republican dissent to the Commission's findings.  

Six members of the Commission signed onto the group's final conclusions. Of the six, five were Democrats and one was an independent. Two of the three Republicans on the committee issued a dissent, saying that they believe the crisis was caused not by under-regulation of shadow banking systems on Wall Street nor the mortgage-backed guarantees of subprime borrowers. Instead, they blamed a global credit bubble which engulfed housing and lending. For evidence, they pointed to Europe's similar crisis. Angelides agreed that a credit bubble was taking place, but thinks a credit boom shouldn't necessarily spell disaster. 

There was, in fact, a lot of money sloshing around in the system. There was foreign capital coming into the US looking for safe real estate assets. There were credit bubbles and housing bubbles in other countries. But…just because you have a lot of capital in the system does not condemn you to the fate of the kind of crisis we’ve now suffered… When you know you have that kind of capital available, you have to take the steps…That will make sure you don’t have an extreme bubble and then an extreme collapse.

Former Federal Reserve Chairman Alan Greenspan has said policy should not be to pop a bubble, but Angelides thinks in this case he was mistaken. Canada, he said, also had a large flow of capital, but had tighter regulation and did not experience the same sort of crash.

The presence of well-priced capital, lots of available capital, need not be a disaster for that country. That money, instead of being channeled into mortgages that were wholly toxic…could have been channeled into the production of jobs, enterprises, wealth for the society as a whole, so broadly available capital can be a good thing.

Angelides said he also finds it interesting that no one has gone to jail for fraud in the subprime and lending industries. He said the commission had a legal obligation to turn over any evidence they found of potential violations of law to the attorney general, and they have done so.

In the wake of the Savings and Loans crisis, about a thousand S&L executives were convicted of felonies. In this instance, there’s been very little law enforcement. There’s activities around the country focused on mortgage fraud at the borrower and mortgage broker-level, but very little has been done, if anything, in terms of the systemic fraud that may have existed in the system. I will say this — in our report we lay out exactly what happened. We’ve done our job, the prosecutors need to do theirs. And I do think there’s a sense in this country, that there hasn’t been justice. There hasn’t been accountability for what’s happened.

Though there have been civil settlements, Angelides said they have been very light, pointing to a case in which a $140 million gain from financial maneuverings only cost the defendant $40 million in penalties. While he would not say that the investigators had dropped the ball, he does think people have concerns over the appropriateness of law enforcement’s investigatory response.

I just think the prosecutorial arm of the American government owes it to the American people to pursue cases where there are cases, and I think there’s a sense in the country that in the wake of this massive breakdown… people expect an aggressive effort and they haven’t seen it.

The chairman conceded that there are both federal and state level prosecutions to pursue, and said he understands that these things take time. Nonetheless, he said, “it needs to be pursued, and people need to feel there’s a sense of real justice.”

With so many banks still holding toxic assets, and some lingering questions about who ultimately bears responsibility for unscrambling collateralized debt obligations (CDOs), Angelides predicts continuing difficulty in clearing up who owes what in the housing market. While he said the involvement of so many parties will make for a difficult process, Angelides said he thinks the administration needs to have a much more aggressive program to help people stay in their homes.

It’s a great irony that the machine that was built in order to create millions and millions of mortgages in the 2000s is now proving extraordinarily difficult to unwind...It’s making it extraordinarily hard to modify mortgages so that people can stay in their homes. It’s hurting the housing market very badly…We need a massive effort in that regard.

A caller asked about situations in which the booming housing market led people to take out loans using the increased value of their home as collateral, only to see that value plummet. Angelides said that the commission investigated that and found that a law that made consumer loans non-deductable, while keeping mortgage interest deduction in place, led people to increase borrowing against their homes for credit. He blames wage stagnation for the consumer needs that ramped up the borrowing for items such as car-purchases or catch-all expenses.

In addition, he said the repeal of Glass-Steagall in 1999 was the result of a long erosion of regulation in banking and certainly influential in the crisis. 

The classic example of a bank that got in trouble through its securities business was Citigroup. I mean, at the end of the day, Citigroup built up about a $55 billion dollar exposure to subprime mortgage securities, and they incurred tens of billions of dollars in losses, and had Glass-Steagall been in place for some separation, that banking institution wouldn’t have been threatened. I don’t know that it was the cause, but it did add some fuel to the fire.

In regards to a question about the practice of securitizing student loans, Angelides ventured a guess about the future.

I will tell you this, if unemployment stays high, if the foreclosure trend in this country stays steady, it will be a consistent drag, and of course these all have ripple effects… all these are continuing threats both to the economy and the financial system. I don’t think we’re out of the woods by any means at this point in time.



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Comments [16]

james o. clifford

How did Angelides get this job? He has no conscience. Just google Angelides-Roberti primary. The bank sharks look good next to him.

Apr. 20 2011 06:09 PM
Eugenia Renskoff from Brooklyn, NY

Hi, Brian, If the jails are overcrowded, they should built new ones to get all the crooks in jail where they deserve to be. Eugenia Renskoff

Feb. 24 2011 02:38 PM
Eugenia Renskoff from Brooklyn, NY

Hi, Brian, All I want to know about the financial mess is how to get my money back. I was in a mortgage fraud/predatory lending/foreclosure situation back in the early part of the 2000s. I wrote 2 letters to the FBI, one to the Attorney General of GA and another to the governor. To have to pay in so many humiliating ways just because of somebody else’s greed is totally unfair and unacceptable. Eugenia Renskoff

Feb. 24 2011 02:09 PM

@Bell Amber from nyc:

No one is going to jail because the jails are already overcrowded. We continue to wax nostalgic over the Clinton economy and its architects. These are the Democrats and Republicans who built the furnaces in which we have destroyed our financial system.
For all the deficit obsessed Republicans: why weren't you concerned when you voted for the first half of the TARP? And for all you "holier-than-thou Democrats crying for the welfare of the poor: who was paying for your sympathies when you approved the second part of the TARP (which included Sen. Dodd's provision (championed behind the scenes by Obama's secretary of the Treasury) providing for inflated bonus payments to drone office workers)?
Much of the government money went to non-bank companies (e.g. Goldman Sachs) who were allowed to become banks after the politicians rang the "come-and-get-it" bell for bailout money.
It looked just like the "blow-off" surrounding a 3-card monte game.

Anyone care for a cup of tea?

Feb. 24 2011 12:16 PM
Amy from Manhattan

What about the ratings companies? Can a law be passed banning them from being paid by the funds they rate? For that matter, can securitization of mortgages & student loans (as a caller just mentioned) be outlawed?

Feb. 24 2011 11:54 AM
Al from New Jersey

Why has the term "economic bailout" stuck instead of "welfare for the wealthy" or "cash for corruption"?

Feb. 24 2011 11:50 AM
Kathleen from Manhattan

Please ask the Chairman if his committee will make their report available as a free ePub ebook in addition to a PDF document.


Feb. 24 2011 11:49 AM
Ed Walker from Nashville, TN

I read the Final Report, and listened to the testimony of Darcy Parmer, discussing suspicious activity reports.

Can you tell us if the Commission referred any cases involving failure to file SARs for prosecution?

Feb. 24 2011 11:48 AM
Amy from Manhattan

Well, how could the funds (? I don't remember exactly how he put it) be channeled the way Phil Angelides described? What would it take on both the legal and the political level?

Feb. 24 2011 11:45 AM
Kernel Qaddafi from nyc

Prosecutors are future politicians and they need Banker money to finance thier future campaigns....

They know what they need to do to get that money

Feb. 24 2011 11:44 AM
Yourgo from astoria

Why is no one going to JAIL!?!?!?!?!?!

Feb. 24 2011 11:42 AM
RJ from prospect hts

Mr. Angelides, his staff, and fellow commissioners have done a great job within the scope of the mandate they were given. However, the administration has said simultaneously that it does not want to look back and that AG Holder will prosecute any crimes he comes across. Are there any outside parties that, based on his findings, have some leverage/standing/influence to take action without the administration's involvement? Can, say, a social investment organization sue for misuse of funds?

Thanks again.

Feb. 24 2011 11:38 AM
Bell Amber from nyc

How come no one is going to jail over this...

instead of jail the bankers are collecting rcord bonuses....

I know the bankers pay you guys....

Feb. 24 2011 11:36 AM
Yosif from Manhattan

No one ever mentions Phil and Wendy Graham in the great recession. PLEASE explain how these two helped ruin the financial world!

Feb. 24 2011 11:35 AM
Sher from Manhattan

Banks MUST be required to retain some percentage - 20 to 30 percent - of a stake in every loan they make. They cannot be allowed to sell off all the risk they incur! This would instantly change the incentive structure across the board. You cannot rely on enforcement; you must change the functional incentives for each bank, so they Will be self-regulating and more responsible.

Feb. 24 2011 11:16 AM
J.B. from Manhattan

Where is the accountability today? According to the FCIC Report, more than 1,000 executives were convicted of felonies in the wake of the S&L crisis of the late eighties/early ninties. (See FCIC Report at page 36.)

Why haven't executives gone to jail for their involvement in the recent crisis? There is an article by Matt Taibbi in the current issue of Rolling Stone that says this: "Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom. . . has ever been convicted."

Why? What is the matter with our legal system today?

Feb. 24 2011 11:09 AM

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