How We Were Ruined & What We Can Do

The Reckoning

a series of articles by Gretchen Morgenson et al.
The New York Times, September 28–December 28, 2008

Charles Dharapak/AP Images
President-elect Barack Obama and Lawrence Summers, Obama’s choice as director of the National Economic Council, Chicago, November 24, 2008
Some prominent figures in the financial markets insist that unchecked opportunism by financiers was not a root cause of the current credit crisis. Robert Rubin, the former Treasury secretary who has just resigned as a high-level adviser and director at Citigroup, told The Wall Street Journal in November that the near collapse of Citigroup, which was bailed out by the federal government, was caused by the “buckling” financial system, and not any mistakes made at his company. “No one anticipated this,” said Rubin, who once ran the investment firm Goldman Sachs. Others such as Harvey Golub, former chairman of American Express, maintain that the fault lies principally with the federal government, which since the 1990s and even earlier has been actively promoting mortgages for low-income Americans. This, he argues, led to the unsustainable frenzy of sub-prime mortgages in the 2000s.

Charles Morris’s informed and unusual book, The Trillion Dollar Meltdown, provides a decisive rebuttal to all such excuse-making and blame of “government.” Morris makes it clear that it was an unquenchable thirst for easy profits that led commercial and investment banks in the US and around the world—as well as hedge funds, insurance companies, private equity firms, and other financial institutions—to take unjustifiable risks for their own gain, and in so doing jeopardize the future of the nation’s credit system and now the economy itself. In fact, government-sponsored entities, Fannie Mae and Freddie Mac, did have a part in the crisis, but not because they were principally trying to help the poor buy homes. Rather, they were also trying to maximize their profits and justify large salaries and bonuses for their executives. They had been made into publicly traded companies in 1989.

It would be wrong to conclude, however, that the new investment vehicles and intricate strategies for “securitization” that developed in the last thirty years had no value. Beginning in the late 1970s, the practice of packaging mortgages together and marketing them as so-called “collateralized debt obligations” was initially designed with the sensible aim of spreading the risk of making loans, particularly residential mortgages, by selling them to many kinds of investors throughout the US and eventually around the world. If many parties share the risk, this lowers the cost of borrowing and enables more people to buy homes and businesses to invest more in research, plants, and equipment.

But over the last two decades, this innovative system was exploited to stunning excess. Charles Morris is one of the observers who, contrary to Rubin’s claim that no one foresaw the current crisis, anticipated that the increasing gathering of mortgages into highly attractive investment devices had made the financial system dangerously vulnerable. A former banker himself, and author of several excellent books on finance over the past…

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