New York Times editor talks fallout of financial crisis

To understand the state of the nation three years after “one of the most upsetting and baffling episodes of financial history,” one must examine current economic practices and regulation of the financial services industry through a historical lens. Only thus can one determine whether those involved in creating and enabling the 2008 crisis have been held accountable Gretchen Morgenson, assistant business and financial editor and columnist at the New York Times, argued before a crowd of 150 in Dodds Auditorium on Monday night.

“There was so much we did not know and even to this day still don’t know about the causes of the 2008 financial crisis,” she said. “Like an archaeologist, we are still digging among the wreckage, putting shards of pottery together like puzzle pieces.”

Morgenson began by noting how the 2008 crisis was unique from past financial crashes.

“This is a different kind of crisis than in recent years,” she said. “We are used to crises going away differently, quickly, like that of long-term capital management or the Internet bubble. But this was a crisis built on debt —massive, massive amounts of it. We are trying to go through a deleveraging process to purge debt from the late 1990s and early 2000s.”

Recent statistics from the Federal Reserve show that household debt is 115 percent of household income. “Mortgages are the largest debt held by American households,” she said. “Today those debts stand at $2.5 trillion.”

Morgenson explained that this debt was not accrued by purchasing of superfluous items: “Throughout the 1990s and 2000s, incomes remained stagnant while the price of college education and pensions rose,” she said. “People were forced to use generous home equity lines ... In 2005, three-quarters of a trillion dollars came from their homes. However, the real estate assets beneath them have plunged in value.”

According to Morgenson, regulation of the financial sector is critical to avoiding future financial crises. When subprime mortgages were sold, borrowers were later evicted and lost their savings, while executives who sold their shares before the end of the line profited.

“The U.S. government wanted to promote home ownership as something that would benefit everyone ... but nothing was done to protect buyers against rapacious lenders,” she explained.

“Our legislature’s response [to the crisis] — the Dodd-Frank Act — did not eliminate the threat of institutions that were too big and politically powerful to fail,” she said. “It runs to thousands of pages, but does not say a word about Fannie Mae and Freddie Mac. It delegates a massive amount of rule-making power to legislators, allowing lobbyists from big businesses to intervene in the process ... [and] it has loopholes allowing banks to buy other banks during times of crisis and buy failing banks if legislators approve, which they often do.”

Morgenson contrasted the Dodd-Frank Act with the 34-page Glass-Steagall Act of 1933 enacted in the Great Depression, wondering if there were special interests at play protecting large banks from accountability.

“Overall, [Dodd-Frank] confers a special status on banks considered systematically important — a.k.a large,” she said, noting that larger banks have lower borrowing costs and higher ratings because government support is assumed. “Smaller institutions will be allowed to go bankrupt without a resolution scheme, while large institutions and their investors will be rescued if they are in trouble.”

“Investigating the origins of the crisis requires connecting dots that appear unrelated and shedding light on exceedingly dark corners,” Morgenson added. “Americans are rightfully outraged that those on Wall Street and in Washington who created the mess have not taken responsibility. In fact, some who had a role in the lead-up to crisis now have better posts.”

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Morgenson said that at last count only one relatively high-level official has gone to jail: Lee B. Farkas, the former chairman of Taylor Bean & Whitaker, who was sentenced to 30 years in prison for a $2.9 billion fraud scandal. However, Taylor Bean & Whitaker was not a major contributor to the financial bubble.

“The S&L crisis of late ’80s and early ’90s is a stark contrast to what happened has happened today,” she said. “Then hundreds of banks failed, but immediately special government forces brought 1,100 cases to prosecutors. Over 800 bank officials went to jail — many former chief executive officers, not flunkies.

Although Morgenson said prosecutors had told her the Savings and Loan crisis was easier to prosecute because the embezzlement was more obvious, she argued that the byzantine nature of the field is no excuse to hide criminal activities.

“I feel that a sense of shame and shared sacrifice has gone missing on some of the leaders of this country.”

“When plunder becomes a way of life for a group of men living together in society,” she concluded, citing Frederic Bastiat, “they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”

Several Wilson School students in the audience said they appreciated Morgenson’s frankness and honesty.

“It’s great to hear people with similar interests out there, who care about the intersections between finance and public policy,” said Maggie Haight, a first year graduate student in the Wilson School.

“This is what our school needs to be focused on in the future,” Rachel Barr, a Woodrow Wilson Ph.D. candidate, noted. “We need to expand the financial regulation element of financial service in our curriculum because there is little study of that here.”