The Financial Crisis Inquiry Commission report was published in January, it followed the commission’s review of millions of pages of documents, interviews with more than 700 witnesses and 19 days of public hearings. OWS Senior Editor Lorie Konish spoke with commission Chairman Phil Angelides about the report’s findings and how they can help shape the industry’s future.
1. How early could the financial crisis been turned around?
If you take just for example subprime mortgage lending, which in many respects was at the heart of this crisis, the very poor quality loans that were then packaged up by financial institutions and sold to investors across the world; the warning signs were there in the late 1990s. The Federal Reserve in the late 1990s was getting reports of egregious lending practices across this country; predatory lending practices. In 2001, the Federal Reserve staff proposed tightening up lending standards to try to curb some of the abuses in the marketplace. The Federal Reserve took an action in 2001 but the rules were so watered down that they only affected 1% of the subprime loans being made in this country. Reports of lending abuses, poor quality mortgage loans accelerated through the 2000s, but it wasn’t until 2006 that Alan Greenspan, who was head of the Federal Reserve until the beginning of 2006, [that the Fed] even put out voluntary guidance to banks and other financial institutions warning them about mortgage lending practices. It wasn’t until July 2008 when the financial system is already in collapse that the Federal Reserve adopts a rule that says you can’t make a loan to a person who can’t afford to pay that loan back. And if you look at that period from the late 1990s to the early 2000s, what you see are plenty of warning signs. You see the unsustainable rise in housing prices. You see widespread reports of lending abuses in the marketplace. You see the creation of trillions of dollars of mortgage securities, many of which turned out to be phony and highly defective. So the warning signs were all along the way, but they were ignored by the policymakers, by the regulators and by the CEOs of the major financial institutions.
2. Does Dodd-Frank adequately address those issues?
It’s a good and strong bill and it needs to be implemented and it does plug some of the big gaps that existed in our regulatory system. For example, it does now return transparency and basic regulation to the over-the-counter derivatives market, which was deregulated in 2000, a classic example of a conscious policy decision that went very wrong. So for example, under Dodd-Frank, over-the-counter derivatives, which had grown to be a $600 trillion market, will now be in the sunshine of transparency. So market participants and regulators can see what’s going on in what became a dark market in the 2000s, and contributed to the panic in the marketplace in 2007 and 2008. Dodd-Frank puts in place some important consumer protections with a Consumer Financial Protection Bureau to make sure that there are good protections for mortgage lending and other credit for consumers in the marketplace that didn’t exist. It brings some oversight to our shadow banking system. What happened from 1980 on is a whole system of non-bank financial institutions grew up with very light regulation. By the beginning of 2008 that shadow banking system was bigger, $13 trillion in assets, than our regulated bank and thrift system. So it brings some oversight to that segment of the market. But I will tell you that I believe that the road to reform is long, because we did have a set of regulations. Part of the problem was, even where regulators had power, they didn’t exercise it. The Securities and Exchange Commission could have clamped down on excesses at the investment banks and they didn’t do it. The Federal Reserve Bank of New York could have curbed the excesses at some of the big bank holding companies like Citigroup, and they didn’t do it. So it will take, yes, Dodd-Frank, but also it will take regulators that have the backbone and the will and the capacity and the resources. And candidly, it will take a new sense of corporate responsibility and prudence by the leaders of our financial institutions because, at the end of the day, if you look at the major money center financial institutions, almost without exception they took extraordinary risk that drove their companies over the cliff and our economy with it. [Current Federal Reserve chairman] Ben Bernanke told us at the commission that in the fall of 2008, 12 of the 13 major financial institutions in this country were within weeks of collapse. That was because of the recklessness and the risk that they had taken. Hopefully that won’t be repeated.
3. We talked about “too big to fail” then. What about the size of the banks now?
To the extent that we had “too big to fail” banks before the crisis, we now have fewer, bigger “too big to fail” institutions, so I think this is a constant matter of concern. Bloomberg came out with some data recently that indicates that the top ten banks in this country now control 77% of the banking assets, which means there’s more concentration of power in very few banks. It also means in some respects that the regional and community banks across this country, who are extending credit on the front lines to homes and businesses, are at a disadvantage. They borrow at a higher rate because their creditors—the creditors of the biggest banks—assume they will be saved and therefore they’re a safer risk. I will say that Dodd-Frank did put in provisions that I think are helpful. First of all, Dodd-Frank prohibits the Fed from making loans to specific institutions under its emergency authority. Secondly, it does provide for the orderly wind-down of a big financial institution in the event that a big financial institution, a systemically important institution, is in serious financial trouble. So some provisions have been put in the law, but I do think “too big to fail”— it’s been with us for a few decades and it will continue to be something that is real for this country, which is why we need to make sure that these big institutions don’t take outsized risk. I come from the private sector. I’ve spent the majority of my career in the private sector, even though I’ve had some public service experience, and I’m a great believer in the free enterprise system, and all over this country people are starting businesses, they are taking risks. Some businesses succeed, some fail. The difference with these big money center banks is: If they go down the ripple effects are so enormous that they can crush the entire economy, which is why we need to have very strong oversight of those big money center banks.
4. How do you respond to the push back against Dodd-Frank?
I think that we all need to remember what happened in this country. I must say that no matter where I go there’s still a great amount of frustration, anger [and] confusion about what happened. This was not a small bump on the road. This wasn’t the normal dip in the business cycles we should expect out of a free market economy. In America today as a result of this financial crisis, there are 24 million people who are out of work, can’t find full-time work, have stopped looking for work. Four million families, many of them played by the rules, did everything right and then lost their jobs in this economic downturn. Four million families have lost their homes to foreclosure. The estimates are that number may go as high as 13 million. Nine trillion dollars of household wealth and retirement savings have been wiped away. So I think we have to remember what happened in this country. We came very close to another Great Depression. So it behooves us to have the right kind of oversight of this financial industry that is so critical to our economy. In so many respects the financial sector is like the heart of our economy, and that’s where you want stability. Again, I’m a big believer in the free market system. Businesses succeed and fail every day. The difference with the big Wall Street banks is that if they go down, they affect us all. Which is why I think we need to make sure that when attempts are made, as they have been, for example by the House of Representatives, the new Republican majority, to strip away funding from the Securities and Exchange Commission or the Commodities Future Trading Commission, that we push back on the push back; that when efforts are made to weaken the new Consumer Financial Protection Bureau, that we push back on the push back. For the good of our economy, we need a stable financial industry that’s focused not on taking casino-like risks, but on supplying capital and credit to expand businesses and jobs in this country.
5. Can advisors do anything to prevent a recurrence?
When we talk about who was affected by this crisis, what’s really struck me, and as I talk to a lot of my private sector colleagues across the country, there’s a great amount of frustration regardless of party among a lot of business people who were doing the right thing—running their businesses—and then of course they were walloped by what happened on Wall Street. And I know financial advisors now see their businesses affected; they see their clients greatly affected. I think there are a couple of things [advisors can do]. First of all, all of us need to do our jobs as citizens, that where we see excesses we need to speak out. Where we see the need for prudent protections for the public, we need to speak out, talk to our members of Congress; raise our voices. I am out in California. I’ve run a business for many years. It’s always good to remember that it’s important for people to hear in Washington from people around the country because, gosh knows, the lobbyists are there each and every day. But the other thing I think financial advisors can do is, as they know, there’s no such thing as a high-yielding, low-risk financial instrument, and so I think that financial advisors need to be very wary when they see instruments like mortgage securities that were peddled in the 2000s, many of which were billed as high-yield, low-risk, when in fact they ended up being very low yield, if not big losers and high risk. So I think they need to do their job in identifying what are the right kinds of products that ought to be in the marketplace and ought to be provided to their clients. In a sense, do the kind of due diligence at their level that helps strengthen the marketplace, and demand transparency. Financial advisors are benefited, to the extent that we have transparent markets, to the extent there’s more information in the marketplace for the public, for market participants, for regulators, we’re better off. One of the real problems coming into this crisis is so many of our markets were dark markets without the kind of information people needed to make the right kind of decisions.