Bill Moyers
June 29, 2007
Gretchen Morgenson on the Mortgage Meltdown

BILL MOYERS: It was very hot here in New York this week. We even had some power outages. But down on Wall Street, worried brokers and bankers were talking about a different kind of meltdown. Its cause is not global warming and high temperatures but the housing market. Look at these headlines. The giant investment firm of Bear Stearns is in trouble. Two of its high-flying hedge funds said to be on the verge of collapse. There were even rumors in the press that Bear Stearns is just the tip of the iceberg, that many investment firms took a gamble on what bankers and brokers call subprime mortgages and now wish they hadn't. Because all across the country we're seeing rates of foreclosure and delinquency shoot up. When times were good, these adjustable rate loans helped people move into the houses they wanted. But as interest rates have climbed, so have mortgage payments jumped so high that many people can't pay them back. At the same time, so many new homes were built that there's a glut: more homes for sale than buyers to buy them.

So the woes on Main Street reach back to Wall Street and vice versa. That's behind the fear of a financial meltdown. Gretchen Morgenson covers the financial world for the New York Times. A former stockbroker, she's now a columnist and assistant business and financial editor at the Times. She won the Pulitzer Prize in 2002 for her trenchant and incisive coverage of Wall Street. Welcome to The Journal.


BILL MOYERS: You ended your column this week saying, "Hold onto your hat. It's going to be an interesting summer." So I'm holding onto my grandson Henry's hat because it's the one I have. He's here this week. Why should I hold onto it? What's going to happen?

GRETCHEN MORGENSON: We're just starting to see, I think, the shaky ground that is the result of what you just described, which was excessive amounts of loans made to people who could not afford them and excessive amounts of money thrown into the mortgage arena by investors who were very eager for high-yielding investments. I think it was a mania. It fed the real estate mania, the real estate bubble in many parts of the country.

BILL MOYERS: Is it conceivable to you that Bear Stearns and some of these other firms could trigger, in fact, a meltdown, a falling domino all the way through the economic cycle that everybody would be affected by this?

GRETCHEN MORGENSON: Well, I think the economy is already being affected by it, Bill, because real estate has been such a driver. The increase in home prices was such a driver of the economy for so long. You know, people were withdrawing equity from their homes. As they saw the value of their homes go up, they were taking them out. They were using them like an ATM, cashing out that equity and going to Europe on a vacation, maybe buying a second home. It was a way for the consumer to cash out of what he or she saw was an escalating asset. And that drove a lot of consumer spending. You're seeing it in the home builder stocks that are down. You're seeing it in Home Depot, companies like that that are not having the, you know, revenues and earnings that they did because people are not-- they're pulling back now. They're not buying the second home. They're trying to get rid of the second home. So it's already started to affect the economy in the overall.

BILL MOYERS: I mean, it's one thing for a homeowner out there in New Jersey or Denver or Dubuque to have to foreclose. Sad, personal tragedy. But what makes that and what makes Bear Stearns create what the New York Times editorial said is "a dangerous financial time"?

GRETCHEN MORGENSON: So many things. But one thing is in the old days when you borrowed to buy a home, you had a one-on-one relationship with your banker. The banker knew you. You knew the banker. He knew or she knew whether you were money good on that loan. And it--

BILL MOYERS: That you could pay it back.

GRETCHEN MORGENSON: And that you could pay it back. And you would have a relationship with that person. Now, who knows who owns your loan? Wall Street has come up with this wonderful system of packaging mortgages into big, huge pools of thousands of mortgages. Slicing them up, cutting them up, and selling them to investors. I've talked to lawyers who are trying to help people out who are in foreclosure who can't even identify who owns the loan.

BILL MOYERS: So somebody lends money to a home buyer who's not a good credit risk, who can't really pay it back. But then that lender, as I understand it, sells the loan to Wall Street. And the lender walks away.


BILL MOYERS: And that just escalates with a lot of people doing it?

GRETCHEN MORGENSON: It feeds into this idea that we need to make more loans. The lender in the old days kept the loan on the balance sheet, had an interest in seeing that it was repaid. Now this lender sells it to someone else. Not his problem anymore. Gets the money back to make another loan. The lenders now are more interested in earning the fees associated with the mortgages, which are extremely lucrative. And they have no credit risk because they have pawned off the loan on somebody else; it's somebody else's problem. That helped to feed this mania for mortgage produ-- mortgage securities that then played into this idea of giving a mortgage to anybody who was ambulatory.

BILL MOYERS: No questions asked.

GRETCHEN MORGENSON: No questions asked.

GRETCHEN MORGENSON: We had a situation where they would give money to people who could not document their income, who could not provide a down payment. Then you would have second loans on top of those loans which they call silent seconds or piggy-backs. There was so much money around, Bill, that seeking, you know-- looking for a way to be deployed--

BILL MOYERS: To earn interest.

GRETCHEN MORGENSON: --to earn interest.

BILL MOYERS: Yeah, to earn inter-- right.

GRETCHEN MORGENSON: There was so much money around that they just threw it at anybody.

BILL MOYERS: The chairman of the House Financial Services Committee, Barney Frank said on television this week that it's a pretty simple matter. Don't lend money beyond what they can expect to pay and don't lend money without verifying what people can pay back. That's pretty good advice, isn't it? Why don't they follow it?

GRETCHEN MORGENSON: Sounds pretty simple, right? Well, why didn't they follow it? Because there was so much money to be made in fees by not following it. Throw money at people who can't pay their loan back. It won't matter. I'm not going to own the loan. I'm not going to have it. It'll be somebody else's problem by the time it comes a cropper.

BILL MOYERS: So what's the effect down on Main Street? When you look out across the country, what does this mean to ordinary folks?

GRETCHEN MORGENSON: I think we're going to have a protracted decline in real estate prices. And whether or not it depends what your circumstance is. Each person's different. Do they have equity in their home? Then they don't have to worry so much. If they don't have equity in their home and they have a mortgage that's going to reset at a higher rate because interest rates have risen, maybe they can't afford the mortgage anymore. Maybe their house is going to go on the market. It's going to be a long, unwinding process. It's not going to be pretty. It's going to have a negative or a pressure effect on real estate. Continued. We've already seen it to some degree. And I just think that people are going to be less willing to take risk. And that will extend into the corporate bond market, the ability for companies to raise money, their interest costs will go up. They'll have to pay investors more because investors are going to say, "Wait a minute. I'm afraid of risk here. I'm going to demand more money for my investment dollar." Companies will have to pay more. It's going to have a major impact.

BILL MOYERS: So who's responsible for this fiasco?

GRETCHEN MORGENSON: Wall Street is responsible. Investors, to some degree, are responsible. They were clamoring for yield. They wanted more return on their investments. Regulators were asleep at the switch. Bond rating agencies were asleep at the switch. They're supposed to be out there telling people this is a solid company or this is a solid loan or this is not. There were a lot, a lot of fail safes that failed.

BILL MOYERS: Who's supposed to be minding the store?

GRETCHEN MORGENSON: Well, that's the problem. Again, we have a situation where there are regulatory loopholes or cracks in the system that allow this kind of speculation to take place. First of all, in the old days, a banker had to, of course, respond to his regulator and had to have the proper implementation of rules and regulations. Now we have mortgage brokers that are not regulated by anyone. We have mortgage appraisers who might have an interest in jacking up an appraisal on a property to get a fee. They're not regulated by anybody. So we have these cracks in the regulatory net that have allowed this mania to really go on.

BILL MOYERS: But where's the Fed in all this? I mean I was in Washington a number of years. The Fed had an office of banking. Its job, its mission was to try to make sure that there was some due diligence and some oversight of this kind of process. What's happened to that?

GRETCHEN MORGENSON: Well, the Fed is interested in the safety and soundness of the financial system, okay? And so in this particular situation, you have loans that are being made, then securitized, made into securities sold on Wall Street. So the bank is not at risk necessarily as much as it was in the old days when a bank might make a bad loan. Now it's the investor who owns the loan. The Fed is not about protecting investors. That's the Securities and Exchange Commission's job. So it's changed the whole way that mortgages are now sold, underwritten by banks and then securities firms has changed the entire makeup of this market, turned it into a mania, and now we're feeling the ill effects of the unwinding.

BILL MOYERS: Was Washington feeding this, fueling this, or welcoming this? I mean, after all, it is a good thing when people can buy homes that they couldn't afford otherwise. So if you're a politician there and people are happy in your district because they're buying a house, you'd feel pretty good about that, right? You're not going to say no to the gravy truck.

GRETCHEN MORGENSON: Absolutely. And it's been a policy of the government to try to encourage home ownership. And under-- with this mania, with the subprime loans that were going on, we did reach a peak in home ownership of 69 percent.

BILL MOYERS: Right. The highest in history.

GRETCHEN MORGENSON: The highest in history. But I would ask you, "What's the good of getting people into a home if they can't afford it and they're then going to have to go into foreclosure?" It goes back to the idea of suitability. Are these loans suitable to the people that you're giving them to? Are these investments suitable to the investors who are buying them? There seem to have been a breakdown in that question.

BILL MOYERS: Is there anything anybody can do? The government? More regulation? What?

GRETCHEN MORGENSON: I'm not really a fan of more regulation when the existing one didn't work. I think smart regulation is the answer here. I think what you alluded to earlier is a really important point. In the securities industry, in Wall Street, when you buy a stock, you are supposed to-- your stock broker's supposed to say, "Bill, is that an appropriate stock for someone of your income? Your age? Your needs? Your-- you know, what are you looking for?"

You're not supposed to buy a sketchy stock if you're a person who only wants safety. Why can't we have that same kind of an idea with a mortgage? Is this mortgage product appropriate for you? In the securities laws it's called "know your customer." It's called-- you know-- is it appropriate for you? I think we need something like that--

BILL MOYERS: Because it--


BILL MOYERS: --doesn't the government have to ask it?


BILL MOYERS: Who does?

GRETCHEN MORGENSON: It's left up to the bank, to the lender, to the mortgage broker, and that--

BILL MOYERS: Bear Stearns?


BILL MOYERS: To the hedge funds that Bear--


BILL MOYERS: But I mean, look what they've been doing. Their past experience is no indication that they will respond to what you're saying.

GRETCHEN MORGENSON: Only if they're held accountable.


GRETCHEN MORGENSON: And if they have to pay the bill that comes a cropper. Let's not make it a bail out where the taxpayer bails out Wall Street, please.

BILL MOYERS: Then Wall Street would be the winner and--

GRETCHEN MORGENSON: Then Wall Street would say, "Fine. I'll go do that again. I'll go throw money at a problem and let it blow up, and I don't mind."

BILL MOYERS: Does this contribute to what you and I both know are-- is growing inequality in the country? The gap between the rich and the poor? The greatest gap since 1929? Is this contributing to that gap?

GRETCHEN MORGENSON: To the degree that Wall Street made an awful, awful lot of money on these securities, yes, it contributes to that gap. To people who work on Wall Street, you saw the enormous bonuses, the enormous payouts to the CEOs of these firms. Absolutely. The mortgage mania contributed to that. The little guy doesn't have the benefit of all the powerful friends in Washington and the powerful friends on Wall Street. The little guy is just trying to be able to retire comfortably and not have to scrimp and worry about money. And he and she have a right to that. And if we're in an ownership society that's ballyhooed around, that should be a benefit. That should be who wins. But unfortunately, the little guy is the guy that's usually the bag holder.

BILL MOYERS: Are we living in a new gilded age?

GRETCHEN MORGENSON: Absolutely. A new gilded age. Except this time around, instead of when we had Vanderbilts and Goulds and Morgans and pick your name, building--

BILL MOYERS: Rockefellers.

GRETCHEN MORGENSON: --physical assets that produced goods that people bought or transported--

BILL MOYERS: Railroads-- railroad steel firms.

GRETCHEN MORGENSON: --goods. Correct.

BILL MOYERS: Right? Right.

GRETCHEN MORGENSON: Now, this gilded age is all about pushing paper around and making money on money.

BILL MOYERS: Financial engineering.

GRETCHEN MORGENSON: Financial engineering. Exactly.

BILL MOYERS: Well thank you very much Gretchen Morgenson.


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