Authors: Charles Ferguson
Thanks to my lovely girlfriend, Audrey, and all my wonderful friends and family, who tolerated me and survived me and entertained me while I was In The Tunnel, and who keep showing up at my
dinner parties even though the food is always the same. Athena Sofia, for being herself. My mother, for being a secret weapon of research. The
Mercer lobby staff, for the
best office anyone could ever want. Craft and Giorgione, for all those very late dinners after a long day attacking the book. Everyone at Chez Panisse and Oliveto, too, for letting me show up
really late but still feeding me so wonderfully when I was working in California.
I just wish that my thesis advisor, Carl Kaysen, could have lived to see the film and the book. The hard stuff about economists would have troubled him, but overall, I think he would have been
pleased. Going to Carl’s funeral was one of the toughest things I’ve ever done. I hope his widow, Ruth, and daughter, Zanny, will think that I’ve done him (or rather the education
he gave me) justice by writing this.
Finally, my ridiculously patient and competent and effective assistant, Stacy Roy, who has endured my midnight phone calls, Sunday morning e-mails, crises, disorganization, overcommitment, and
eccentricity—thank you, Stacy, for making everything possible. (And you—yes, YOU, whoever you are right now reading this, don’t you dare hire her.)
Thank you all for making this possible. As grim as much of this book is, it was actually very enjoyable to write it, because I learned so much and had such good company all along the way.
NOTES
CHAPTER 1 Where We Are Now
1
. Except as indicated, all US economic data in this book are from the most recent official sources (i.e., as of 3Q 2011, if available).
2
. William T. Vollman, “Homeless in Sacramento,”
Harper’s Magazine
, March 2011.
3
. U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States: 2010,” September 2011; Congressional
Budget Office, “Trends in the Distribution of Household Income Between 1979 and 2007,” October 2011, http://www.fns.usda.gov/pd/SNAPsummary.htm.
4
. OECD StatExtracts: Labour Force Statistics, http://stats.oecd.org/index .aspx?queryid=251.
5
. Emmanuel Saez and Thomas Piketty, “Income Inequality in the United States, 1913–1998,”
Quarterly Journal of
Economics
, 118(1) 2003, 1–39 (tables and figures updated to 2008 in Excel format, July 2010, http://elsa.berkeley.edu/~saez/); G. William Domboff, “Wealth Income and Power,”
Department of Sociology, UC Santa Cruz, November 2011, http://www2.ucsc.edu/whorulesamerica/power/wealth.html.
6
. Julia B. Isaacs, “Intergenerational Comparisons of Economic Mobility,” in Julia B. Isaacs et al.,
Getting Ahead or Losing
Ground: Economic Mobility in America
, 37–46, Brookings Economic Mobility Project, February 2008; Patrick M. Callan, “International Comparisons Highlight Educational Gaps Between
Young and Older Americans,”
Measuring Up 2006: The National Report Card on Higher Education
, http://measuringup.highereducation.org/commentary/introduction.cfm.
7
. All company data are from annual reports and SEC filings.
CHAPTER 2 Opening Pandora’s box : The Era of Deregulation , 1980–2000
1
. Vincent Carossa,
Investment Banking in America: A History
(Cambridge, MA: Harvard University Press, 1970), 322–351.
2
. Banking Act of 1933 (original version), Public Law 66, 73rd Congress, sec. 21(a)1.
3
. Thomas Philippon and Ariel Resheff, “Wages and Human Capital in the U.S. Financial Industry: 1909–2006” (December 2008);
draft available at http://pages.stern.nyu.edu/~tphilipp/papers/pr_rev15.pdf.
4
. Lawrence J. White,
The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation
(New York: Oxford University Press, 1990);
Martin Mayer,
The Greatest Ever Bank Robbery
(New York: Scribners, 1990). Mayer reprints the Greenspan letter on pp. 334–336.
5
. The standard sources are James Stewart,
Den of Thieves
(New York: Touchstone, 1992); and Connie Bruck,
The Predators’ Ball:
The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders
(New York: Penguin, 1989).
6
. For a minute-by-minute account of the 1987 crash, see the Brady Commission Report, Report of the Presidential Task Force on Market Mechanisms
(Washington, DC: USGPO, 1988).
7
. Bethany McLean and Joe Nocera,
All the Devils Are Here: The Hidden History of the Financial Crisis
(New York: Penguin, 2010), chapter
2, “Ground Zero, Baby.”
8
. Yves Smith,
Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism
(New York: Palgrave Macmillan,
2010), 152.
9
. Charles R. Morris,
Money, Greed, and Risk
(New York: Times Books, 1999), 168–171.
10
. Alan Greenspan, “Testimony Before the House Committee on Banking and Financial Services,” September 16, 1998.
11
. Alan Greenspan, “Testimony Before the House Committee on Banking and Financial Services,” October 1, 1998.
12
. Alan Greenspan, “Remarks to the Chicago Conference on Bank Structure and Competition,” May 8, 2003.
13
. “Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems,”
PBS NewsHour
,October 23, 2008,
http://www.pbs.org/newshour/bb/business/july–dec08/crisishearing_10–23.html.
CHAPTER 3 The Bubble, Part One: Borrowing and Lending in the 2000s
1
. Federal Reserve Board, “Selected Interest Rates,” http://www.federalreserve.gov/releases/h15/data.htm.
2
. Center for Responsible Lending, “Subprime Lending: A Net Drain on Home Ownership,”
CRL Issue Paper
no. 14, March 27,
2007.
3
. S&P/Case-Shiller U.S. National Home Price Index,
http://www.standardandpoors.com/indices/sp–case–shiller–home–price–indices/en/us/. Between January 2000 and December 2005, the 10-City Index increased by 120 percent,
the 20-City Index by 103 percent, and the National Index by 87 percent.
4
.
The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the
United States
(New York: Public Affairs, 2011), 89–90.
5
. S&P/Case-Shiller index.
6
. Rick Brooks and Constance Mitchell Forbes, “The United States of Subprime,”
Wall Street Journal
, October 11, 2007. The
article covers only “high-rate” loans, a category that excludes all the high-risk loans initiated with very low teaser rates, which may have been the majority of them.
7
.
Financial Crisis Inquiry Report
, 89.
8
. The primary source materials for WaMu are
Wall Street and the Financial Crisis: Anatomy of a Financial Collapse
, hearing before the
U.S. Senate Permanent Subcommittee on Investigations (hereafter PSI), 111th Congress, 2nd sess., April 13, 2010, “Exhibits: The Role of High Risk Loans” (exhibits are not paginated);
and
Federal Deposit Insurance Corporation v. Kerry K. Killinger et al.
, Complaint, U.S. District Court, Western District of Washington at Seattle, March 16, 2011.
9
. PSI,
Wall Street and the Financial Crisis
, “Exhibits: The Role of High Risk Loans,” Washington Mutual, “Higher Risk
Lending Strategy,” Finance Committee Discussion, January 2005, and Home Loans Discussion, Board of Directors Meeting, April 18, 2006.
10
. Ibid. Washington Mutual, President’s Club 2006—Kauai Business
Meeting.
11
. Ibid. Rotella to Killinger, April 27, 2006.
12
. Ibid. Jill Simons to Timothy Bates, Risk Mit Loan Review Data “Confidential,” e-mail, August 28, 2005.
13
.
Cambridge Place Investment Management Inc. v. Morgan Stanley & Co.
,
Inc. et al.
, Superior Court of
the Commonwealth of Massachusetts, Complaint and Jury Demand, July 9, 2010, 55–56;
The People of the State of New York v. First American Corporation et al.
, Supreme Court of New York,
March 30, 2009.
14
.
FDIC v. Killinger
, 23, 25.
15
. PSI,
Wall Street and the Financial Crisis: Anatomy of a Financial Collapse
, Majority and Minority Staff Report, April 13, 2010,
http://hsgac.senate.gov//files/14/07/16/f140716/public/_files/Financial_Crisis/FinancialCrisisReport.pdf.
16
. http://www.nytimes.com/2011/12/14/business/ex-bank-executives-settle-fdic-suit.html.
17
.
Financial Crisis Inquiry Report
, 89–90; “Final Report of Michael J. Missal, Bankruptcy Court Examiner” (hereafter
Examiner’s Report),
In re: New Century TRS Holdings, Inc. et al., Debtors
, U.S. Bankruptcy Court for the District of Delaware, 57.
18
. Examiner’s Report, 81–82.
19
. Ibid., 2
20
. Ibid., 127–128.
21
. Ibid., 131.
22
. Ibid. (Covers the accounting issues in detail; see esp. 177–212.)
23
. Shawn Tulley, “Meet the 23,000% Stock,”
Fortune
, September 15, 2003. The Countrywide account is based primarily on the
e-mail trails and other documents assembled by the FCIC. The individual documents are available on a searchable website, http://fcic.law.stanford.edu/resource.
24
. For one list, see http://en.wikipedia.org/wiki/Angelo_Mozilo#.22Friends_of_Angelo_.28FOA.29.22_VIP_program.
25
. This account of Foster’s experiences at Countrywide relies heavily on three sources. The first is the OSHA Finding letter describing
her experiences after she filed a whistleblower lawsuit, which she won. The letter can be found online at http://www.documentcloud.org/documents/250789-cwd-ef-final-osha-order.html#document/p8. The
second source is her interview with Steve Kroft, broadcast on
60 Minutes
in December 2011. This can be found online at
http://www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street/?pageNum=8&tag=contentMain;contentBody. The third source is Michael Hudson’s articles based on his interview with
her. Michael Hudson is a journalist working at the Center for Public Integrity. His articles can be found at http://www.iwatchnews.org
/2011/09/22/6687/countrywide-protected-fraudsters-silencing-whistleblowers-say-former-employees.
26
. See http://www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street/?pageNum=2&tag=contentMain;contentBody.
27
.
Commonwealth of Massachusetts v. Fremont Invest & Loan et al.
, Final Judgment by Consent, June 9, 2009. The final judgement
included a $10 million fine.
28
. Cited in
Cambridge Place Investment v. Morgan Stanley
, 66.
29
. Ibid., 69–74.
30
.
Financial Crisis Inquiry Report
, 89, 12.
31
.
Cambridge Place Investment v. Morgan Stanley
, 75–78.
32
.
Washington Post
, June 10, 2008, see http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html.
33
. Calculated from respective annual reports.
34
. http://www.sec.gov/news/press/2011/2011-267.htm.
35
. Alan Greenspan and James Kennedy, “Sources and Uses of Equity Extraction from Housing,” Federal Reserve Board, 2007. Mr Kennedy
at the Fed has kept the data up to date beyond the period in the study and furnishes them upon request.
36
. “A Home-Grown Problem,”
Economist
, September 10, 2005.
CHAPTER 4 Wall Street Makes a Bubble and Gives It to the World
1
.
Financial Crisis Inquiry Report
, 152–154.
2
. http://www.finra.org/AboutFINRA/Leadership/.
3
.
The Charles Schwab Corporation v. BNP Paribas Securities, Inc., et al.
, Amended Complaint, Superior Court of the State of California,
August 2, 2010.
4
.
Financial Crisis Inquiry Report
, 166.
5
.
Ambac Assurance Corporation et al. v. EMC Mortgage Corporation et al.
, Complaint, Supreme Court of the State of New York, February 2,
2011.
6
. Consolidated Amended Class Action Complaint,
American Home Mortgage Securities Litigation
, U.S. District Court, Eastern District of New
York, June 3, 2008.
7
.
Ambac v. EMC
, 70.
8
. Ibid., 71n181.
9
.
Ibid., 71.
10
. Ibid., 72, 72n185.
11
. Ibid., 74–76.
12
. Ibid., 81–83.
13
. Ibid., 78, 86–87.
14
. Ibid., 93, 93n255.
15
. Ibid., 65, 66n161, 69.
16
. Ibid., 99–100.
17
. Ibid., 97.
18
. Ibid., 103.
19
. Ibid., 104.
20
. Allan Sloan, “House of Junk,” http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm.
21
.
Employees’ Retirement System of the Government of the Virgin Islands et al. v. Morgan Stanley & Co., Incorporated, et al.
,
Class Action Complaint, U.S. District Court, Southern District of New York, December 24, 2009.
22
. Ibid., 13.
23
. Ibid., 15.
24
.
In re: Morgan Stanley & Co., Incorporated
, Assurance of Discontinuance, Superior Court of the Commonwealth of Massachusetts,
June 24, 2010.
25
.
Virgin Islands v. Morgan Stanley
, 11.
26
. For an interesting and extended dissection of this episode, including Hubler’s relationship to his boss Zoe Cruz and the possible
role of sexism in allowing Hubler’s losses, see http://nymag.com/news/business/46476/.