>> John Haskell:
Welcome everybody.
My name is John Haskell.
I'm the Director of
the Kluge Center here
at the Library of Congress.
The Kluge Center's mission,
in the words of its charter,
is to reinvigorate the
interconnection between thought
and action through conversations
and meetings with members
of Congress, their staffs,
and the broader policymaking
community.
The idea being to
bridge the divide
between knowledge and power.
So what that means that
a day-to-day basis for us
at the Kluge Center is that
we support scholars doing
innovative and specialized work
and projects scholarly work
to a broader audience.
This annual event,
the Maguire Lecture,
as well as the Maguire Chair
in Ethics in American History,
was established in the Kluge
Center earlier this century
by generous gift from Carrie and
Ann Maguire, longtime supporters
of the Library of Congress.
The endowment supports
exploration
of the ethical dimensions of
domestic, economic, political,
and social policies, including
the ethical issues associated
with leadership in the United
States, the implications
of significant issues,
events, and movements
in American history,
and the role of ethics
in shaping business,
urban affairs, law,
science, and medicine.
Turning to the panelists,
Geoffrey Boisi,
is in the middle, is
senior partner and Chairman
of the Roundtable
Investment Partners
and former vice-chairmen
of J.P. Morgan Chase.
Amy Friend at the end is
senior advisor to FS Vector.
Previously, she served as
Senior Deputy Comptroller
and Chief Counsel at the Office
of Comptroller of the Currency
in the Treasury Department.
And she was Chief Counsel
for the Senate Banking
Committee earlier this century.
Prentiss Cox is Professor of Law
at the University of Minnesota,
specializing in consumer
protection.
Prentiss is in the window
pane shirt in the middle,
and specializing in consumer
protection and is a member
of the Inaugural
Consumer Advisory Board
of the Consumer Financial
Protection Bureau.
The panel is scheduled for an
hour and half, a little bit more
of an hour discussion
among the four panelists.
I'll get to the last
one in a second.
She's the most important one,
of course, and we'll have time
at the end for questions in
that period, and then of course,
you're all welcome to
the reception afterward.
Let me introduce Cathy Kaveny,
who is the most recent
Maguire Chair in Ethics
in American History
at the Kluge Center.
She was here through much
of the end of last year
into the first part
of this year.
She's Darald and Juliet
Libby professor of law
at Boston College, and she
specializes in law, ethics,
and medical ethics, areas
where she has written widely,
really prolifically, for
academic, professional,
as well as lay audiences.
I'm going to turn the panel
over to Kathy right now.
Welcome.
>> Cathleen Kaveny: Thank you.
Thank you.
All right, so, just don't think
of me like John the Baptist.
Can just see my head here.
I'd like to thank Dr. John
Haskell and the entire community
at the Kluge Center for a
terrific setting in which
to be a researcher
and a scholar.
To have the resources of
the Library of Congress
and the congenial people who
work here is a great gift
for anybody trying to do
any form of investigation
in the past with a view to
trying to improve our future.
So, thank you very much for your
hospitality during my time here.
And today, as one of the fruits
of my time at the Library
of Congress, we're going to
be taking about complicity
and moral accountability
in the Great Recession.
What's the great recession?
Took place a long time ago.
No doubt, some of the
audience members were
in grade school at the time.
So, I've asked distinguished
Professor, Prentiss Cox,
to begin our discussion by
drawing on his expertise
at the classroom podium, as
well as his extensive background
in consumer protection
law and advocacy.
He will give us an
overview of the crisis,
focusing on its effects
on ordinary people,
especially ordinary
homeowners with mortgages.
Not only does Geoffrey Boisi
have tremendous experience
as an extraordinarily
successful investment banker
on Wall Street.
He has also thought long and
deeply about problems of moral
and structural accountability.
I have encouraged
him to take some
of the key ethical principles
that is Leadership
Roundtable initially developed
to help address the
institutional crisis
in the Catholic Church and
apply them to Wall Street,
these principles include
transparency, accountability,
competency, justice, and trust.
Finally, no one knows more
about the federal
government's response
to the crisis than Amy Friend.
As Chief Counsel of the
Senate Banking Committee,
she was the principal staff
person responsible for crafting
and negotiating Dodd-Frank
in the Senate,
she had a front row
seat in Congress
as the financial
crisis was unfolding,
and then became Chief Counsel
to the Office of the Comptroller
of the currency, where she
oversaw the implementation
of regulations mandated
by Dodd-Frank.
She will help us think about
the crucial task of making law
and regulations that safeguard
consumers and the integrity
of the financial sector.
A key question then and
now, what are the gaps
between what is ideal from
a regulatory perspective
and what is politically
possible.
But first, I want
to spend a couple
of minutes outlining
what I mean by complicity
and accountability, two words
in the title of this panel.
So, let's start from the
fact that we all engage
in moral reflection, and
much moral reflection focuses
on determining whether
particular actions are justified
or not, this is true in
day-to-day life as well
as in academic discussion.
We debate everything
from weather
and when it is morally
justifiable for individuals
to eat meat, snort cocaine, tell
a harmless lie, turn in a friend
for cheating, or
litter in the wild.
We also ask about actions
and patterns of actions
of collective agents,
such as corporations
and voluntary associations.
Take, for example, the
United States We ask,
is our nation's nuclear
policy morally justifiable?
What about the current
policies of ICE with respect
to our southern border?
Now despite their differences,
all of these questions are
first-order moral questions,
they consider whether it
is morally justifiable
for a particular
agent to do something,
to perform a particular
cause of action
in particular circumstances.
But we also face
second-order moral questions.
Questions of complicity.
Is it morally acceptable to
contribute to or to make use
of the fruits of another
agent's wrongful actions?
And despite the abstract
sounding words there,
we all run into questions of
complicity every day, as well.
For example, should you drive
your uncle, who has lung cancer,
to the drugstore so the he
can buy more cigarettes?
That's complicity question.
The law frequently
deals with complicity.
A famous case taught in criminal
law is whether the owners
of the phone answering
service used
by a prostitution
ring were accessories
to the crime of prostitution.
So, questions of complicity have
been around for a long time,
but recent decades have
brought new challenges.
Our globalized, interconnected,
and morally pluralistic world
highlights a third order
of moral problems,
which I group together
under the heading
relational complicity.
As the name suggests, these
sorts of problems arise
in the context of ongoing
complex and unavoidable sets
of relationships, such as the
relationships among financial
consumers, financial
institutions, and regulators.
Each of these sectors, and the
individuals and group agents
within them, has no alternative
but to deal with the others.
It's true, of course, that
individual people can choose
to walk away, but
they will be replaced,
because the institutions
themselves
and the roles they
create remain.
Grappling with relational
complicity requires us
to broaden traditional
complicity analysis in two ways,
first, we need to
grapple with uncertainty.
In long-term relationships,
we may not know exactly
what our actions
and counterparts are doing.
But we have a nagging worry.
What if some of their
actions are dodgy?
They have the same
worries about us.
What do we do with
these worries?
Second, coming to terms with
relational complicity requires
to expand our thinking
beyond fault to harm.
Of course, we need to think
about whether we have
contributed to the intentionally
or negligently wrongful
actions of others,
but that is only the first step.
We also have to consider how
we've contributed to a cessation
that caused unacceptable
harm to third parties,
even if no one was
at fault at the time.
Addressing relational
complexity requires us
to be proactive,
not merely reactive.
To put it another
way, coming to terms
with relational complicity,
requires us to be accountable.
But what exactly does
accountability entail?
In my view, it entails
at least in part,
the exercise of moral memory.
We have to think about the
past through a moral lens.
But at the same time, it's
not primarily about the past.
It's not primarily
about fixing blame,
finding scapegoats,
or assessing damages.
Accountability, rather, asks us
to scrutinize the past in order
to improve the future.
To put it another way,
accountability is a type
of ethical continuous
quality improvement.
Now to be effective,
accountability has
to be dialogical.
Representatives of each
sector should look not only
at their own sectors' actions
in isolation, but also strive
to consider how they contributed
to an unacceptable situation
when combined with the
actions in other sectors.
These actions, at the time, may
not have been morally culpable.
We all may have done the best
we could, all things considered.
But we will be morally culpable
if we do not work together
with the other stakeholders
in other sectors in order
to prevent a similar
situation in the future.
So, the purpose of
today's discussion is
to engage questions of
relational complicity
with virtues I think are very
important, honesty, empathy,
and imagination, taking the
Great Recession as a case study.
The events that precipitated
the crisis took place
over a decade ago, but
even a cursory glance
at the papers gives
rise to fears
that another recession
is on the horizon.
So, I've asked our
distinguished panelists
to each offer brief opening
remarks, which will be followed
by what I am sure will be
a fascinating conversation.
Thank you very much, and thank
you again to Dr. John Haskell.
[ Applause ]
>> Prentiss Cox:
Thank you, Kathy.
As the son of a librarian, it
is a special honor to be here
in one of the motherships
of the library world.
I have been a law professor for
the last 14 years, but during,
from the late 90s until
the summer of 2005,
I was the manager of the
Consumer Protection Division
at the Minnesota
Attorney General's Office
and was the lead attorney or
in the leadership of a series
of cases of subprime
mortgage lenders.
And much of what I have to
say comes from that work,
filtered through reflection
in the years that followed.
So, I'm going to take
just a few minutes
and give you the
four-or-five-minute overview
of the financial crisis.
That should do it, right,
for those of us who
lived through it.
And then I'll take the other
for five minutes to talk
about just a couple of
reflections on the concept
of complicity, as
it applies to that.
The financial crisis
was the result of --
and I'm going to try to
present this somewhat neutrally,
although I have a clear
perspective on this
on what I think are
points of common agreement.
The financial crisis was
the result of a meltdown
in the subprime mortgage market
that caused a financial panic.
Some consensus items among
fair-minded observers,
in my opinion, would be
that the crisis observed
because the subprime mortgage
origination but particularly
because of the spectacular rise
in those types of mortgages
in the period of 2003 to 2006.
The lending began and was
concentrated in non-bank lenders
who were not supervised by
any agency of the federal
or state government,
substantially.
Although, chartered banks,
both thrifts at the time
and national banks, also engaged
substantially in this lending,
including Washington Mutual,
First National Bank of Arizona,
are prime examples of leading
subprime mortgage originators
who were chartered
financial institutions.
The mortgage crisis
was, in my opinion,
really two separate things
that linked and put together.
One was this problem with
mortgage origination,
which we've been talking about,
and the other was the problem
of securitization of the
financing of those mortgages
through Wall Street entities.
And those lenders obtained,
the subprime lenders,
obtained their monies basically,
just to simplify it,
in chunks of money.
They would lend them out, and
then they would take them,
pool them, give them
to Wall Street.
Wall Street would turn them
into these complex
securities instruments,
which I won't go into, and Geoff
would know a lot more about
and could help you, and
so, we had this symbiosis
of people selling these subprime
mortgages to actual homeowners
with a financial system
that securitized those loans
and sold them to a array of
different types of investors.
In the late 1990s subprime
mortgage lending was a tiny
share of the market.
When I first went after First
Alliance Mortgage Company
as the first public enforcer,
or my attorney general was,
to sue a subprime mortgage
lender during this period,
it was only a tiny fraction of
the market, about 2% roughly.
By the time this ended in
2007, subprime mortgages, plus,
it's known as Alt A, together
nonprime mortgages constituted
40% of the market.
So, there was this rapid
explosion of this type
of lending and in a
very short time period.
And as it exploded, these
loans became layered
with different types
of fraud and risk.
The first company I
went after, FAMCO,
actually had very
good underwriting.
These loans weren't
going to go down.
A quarter of their loans
were what we called A paper,
the best borrowers.
Yet they somehow
convince these people
to pay a 20% origination
fee on average
and had exploding
interest rates of 2%,
but they were actually
solidly underwritten loans.
By the end, they had layered in
these different types of fraud
and risk, including undocumented
loans, interest only
and negative amortization loans,
teaser rates, no down payments,
appraisal fraud, all of which
was wrapped into churning.
So, they would get the loans,
then they would call people
up a couple years later,
as they were faltering,
because they were
not sustainable,
they'd give them a new
loan, not even two years.
And they would just
churn these loans
to the same people
over and over.
This resulted, by mid-to-late
2006, with a rapid rise
in foreclosure and an
understanding dawning
on this industry between
mid-2006 and mid-2007,
that this was unsustainable
lending.
Foreclosures -- I tracked
foreclosures in our home county
of Minneapolis, Hennepin,
during this entire time,
and it was a fairly
steady foreclosure rate,
all the way from the
1950s when I had data,
and then it went up 10 times.
I'm not talking about
doubling or tripling.
It went up 10 times.
The level of foreclosures
were horrific,
and the subprime mortgage market
thereafter imploded in 2007.
And this was an important
inflection point.
At the time of implosion
in 2007,
we already understood there was
a problem in the market and had
for half a year to a year.
It was generally understood,
but it was a problem
in the mortgage market.
It wasn't a financial crisis.
And there was a year
to a year and a half
between when we all understood
the mortgage market was melting
down to when we had
the financial crisis
which became apparent
in September 2018.
I believe that if we didn't
have that financial panic
and that financial crisis,
nobody in this room would
be here in this room talking
about this, but the extent of
damage had already been done
in people's lives and
in affected communities.
And that's going to be
my point about complicity
in a minute The harm
to actual people
on the ground had
already been done.
But we began to care about it
when it became a financial
panic, and there was
like this dislocation in time.
And then, finally, once
the scale of these loans
and the amount of the
fraud became clear,
a financial panic ensued
because of the opacity
of these destructive
instruments and the failure
of the financial system to
understand where the investment
and insurance risk lay
in it, which was layered
on with the housing
market that had cratered,
where you had a foreclosure
crisis driving more people
to put their houses on
the market at cheap rates,
which drove down housing prices,
which created more foreclosures
in this negative cycle that
cratered our housing market,
which together with
the financial crisis,
caused quite a problem.
Now I am a bit of a time Nazi.
I have taken longer
than five minutes.
So, I will be extremely quick
about making my two
points about complicity.
I think if you look at
the law, in civil law,
we have this thing called
aiding and abetting,
which is actually a pretty
good colloquial expression
of what complicity is.
And it focuses on a combination
of the knowledge that you have
that the tortfeasor was engaging
in the act and your assistance
for that, and if you
apply that to the crisis,
I want to be two quick points.
One, started the ending.
In fact, start after the ending.
After the financial crisis
happened, I'd been working
in the trenches up to that
point, I thought finally.
We're all going see
that there was a lack
of proper supervision.
There was a lack of, you know,
what the problems were here,
and I was actually stunned.
You might look at me as naïve,
but I was a little stunned how
the narrative shifted like that,
and all of the sudden, we have
Rick Santelli giving this rant.
Even in 2014, I have
a quote here.
"No regrets.
It was about contract law
and about the government
promoting bad behavior."
The Cato Institute in the
fall of 2009 had a forum
on whether the Community
Reinvestment Act,
or the Government
Community Reinvestment Act
that had caused investments
in poor communities,
was the cause of the crisis.
There was a blaming of Fannie
and Freddie, the
secondary market.
They had their problems
but no fair-minded
observer would be looking
to blame the actions of
government in promoting housing
as the cause of the crisis.
The inaction of government
in being an effective
police on the market.
Yeah, that's what it was, and
that was a substantial part
of the problem, but the idea
that government programs caused
this is absolutely absurd.
These were instruments invented
in this non-bank market,
financed by Wall
Street, Wall Street began
to drive what instruments
look like later.
They were aggressively
sold to people
who did not create
collateralized debt obligations,
did not create 228 loans.
The fault of the home owners was
not being sophisticated enough
to resist a very
aggressively sold pitch,
which by the way,
was greenlined.
In other ways, they went and
found people who had equity,
and they targeted
them for refinances,
which is what this
market entirely was
until just the last
couple of years of it.
The complicity of the
people who in this stage,
they had full knowledge
of what had happened,
and they were insisted --
they assisted in remaking that
narrative, which in my opinion,
makes a second crisis
more likely.
That's complicity in my view.
Number two, another
point I'll pick out.
There was a prevailing
at the time,
at the time leading
up to the crisis.
We privileged abstract
knowledge,
and we discounted
human experience.
My personal view
is that the wisdom,
as a government regulator(ish).
I've been an enforcer, as
well as in the academy,
lies in this intersection
between understanding
what's really happening
in people's lives in the
abstract knowledge and data
that come about how
our systems perform,
and seeing the relationship
between those.
But leading up to the
crash, the people who were
on the ground pulling
the alarm --
by the way, I do
not believe this --
I believe the nature
of the financial panic
and the specificity of what
happened was not predictable.
But the idea of the subprime
mortgage meltdown was utterly
predictable, and it was
predicted by all of us
on the ground who were talking
to the people whose lives were
affected by these instruments.
But that knowledge was not the
kind of knowledge that people
with power cared about.
He was dismissed
as anecdotal rather
than saying why is
this happening?
Why are all of you who represent
these communities coming to us
and telling us that
this is going
on when it doesn't
show up in our data?
Instead, there was a sense
that this was unimportant
information,
and I think that we
can learn from that.
That we can learn from that type
of knowledge and who we listen
to and who has part
of the dialogue,
in terms of how we think about
these in the future, thank you.
>> Thank you.
Okay, we'll turn
it over to Geoff.
>> Geoffrey T. Boisi: I want
to add my thanks to Cathy
for bringing us together today
and to raise important questions
in a thoughtful and
honest way to shed light
on a very complex puzzle that
affected the lives of millions
around the world in
a very profound way.
The financial crisis that led
to the Great Recession has many,
many fathers and mothers
and was, in my view,
building over the
decades from the law
of unintended consequences,
culminating in a perfect storm,
leading to a massive loss
of trust among the populace,
which persists still today.
Its birth, at its core, was
a result of bureaucracies,
both public and private,
and some of their leaders not
adhering to their core missions,
core values, and rigorous
implementation of the checks
and balances they were
chosen to oversee.
Many of these supposed
leaders were too focused
on the short-term, with
transactional solutions
and not enough on the
consequences to the common good,
nor the longer-term
implications of their actions.
Crises that cause severe
financial distress fundamentally
occur as a result of
deep uncertainty and loss
of confidence in the
system and its leaders,
not just in financial
institutions
but in the many constituents
who impact decision-making.
Political leadership,
social policy makers,
regulatory policy makers,
monetary policymakers,
management and boards
of directors overseeing
financial institutions,
the media, who has a penchant
for stirring the pot of mistrust
and with their 24-hour
news cycle,
create almost a manic
environment,
and individual consumers
and investors buying
into a cultural attitude
of me first.
I win/you lose polarization.
Trees grow to the
sky casino mentality,
which create momentum buying.
Each of these contributed
to creating a perfect storm.
So, to use Cathy's
term, complicit.
Many people were
complicit at many levels
and not acting with
accountability.
And we can get into as much
detail as you want in the Q&A,
but the broad strokes
are that the match
that lit the fire was
the mortgage crisis,
as Prentiss just talked about.
Particularly, the subprime
mortgages, which coincidentally,
because of their size,
could have been cauterized.
But it evolved into a
deeper financial crisis due
to this loss of trust,
throughout the entire
integrated,
global financial system.
In my view, there's been a fair
amount of glib scapegoating
over the years, with a strong
dose of revisionist history,
which I trust we
can avoid today.
I come to this great house of
learning with a perspective
of some 50 years in leadership,
in both the for-profit
and the not-for-profit sectors,
with particular experience
in the financial services
industry, having served
on the management
committee of Goldman Sachs
when it was a respected private
partnership, and J.P. Morgan
at its conception, but
prior to the crisis,
and as a reform director of
Freddie Mac, having been asked
to help clean up after
the accounting scandal,
and I actually was in the room
when the government forced
that institution
into conservatorship,
which in some eyes,
was unnecessary
and actually fueled
the downward spiral
of confidence in the markets.
So, I had a front row seat
to how the various participants
conducted themselves during this
stressful period, which some
would say was in the fog of war.
I do not come to criticize
individuals nor decisions made
during that period, as I
believe any experienced leader
in the midst of crisis is
doing the best they can
with the circumstances and
facts at their disposal
and given their particular
background and base experience.
But we can analyze
outcomes and alternatives
to prepare for the future.
Financial crises not only
upset financial institutions
and markets.
They can undermine the
very fundamental foundation
of an economy This is because
the financial institutions' role
in today's national and global
markets is both critical
and indispensable.
To perform their roles well,
that is, to keep the wheels
of commerce and industry
spinning smoothly,
financial institutions must
balance their private interests
with broader social and
fiduciary responsibilities.
We entrust them with
our savings,
both short-term and long-term.
We rely on them to
allocate capital and credit
to households, to
business, to governments,
and at the same time,
they perform fiduciary
responsibilities
as custodians of these funds.
But additionally, financial
institutions are propelled
by an entrepreneurial
drive to grow and profit,
to attract capital, and
high-performing professionals
so they can do their work.
I believe the American capital
markets' infrastructure is one
of the country's most
important assets,
which gives us a global
competitive advantage,
and is crucial to our
free enterprise system,
which is the envy of the
world, and therefore,
needs to be carefully
and thoughtfully
nurtured and secured.
Having said that,
sometimes, however,
entrepreneurial risk-taking
overwhelms the restraint
demanded of fiduciary
responsibility.
When that happens, the
result is volatility,
economic dislocation, and
at worse, financial crisis.
Common threads run through
the dozen or so many crises
that occurred before the
great recession over a 30
or 40-year period of time,
and they were also evident
in the mortgage crisis.
There was excess use of credit.
There was discernible
lowering of credit standards.
There was a heavy reliance
on leverage, and usually,
these times were preceded by a
period of period of euphoria.
And typically, postulates
the creation
of a modest regulatory
reforms afterwards.
Now with regard to the
great financial crisis
that we just encountered,
there's no doubt
that there were irresponsible,
unsavory, and in some cases,
illegal mortgage
lending practices,
and that surely played a
role in the credit crisis.
But that, in my opinion,
was just the start
of an understanding
of the causes
of what actually occurred.
For it was the outgrowth of
a set of potent, long-term,
structural changes
in policymaking,
changes in business
and financial markets,
as well as political
and cultural pressures,
which were mounting
over decades.
Almost 100 years ago, when
many small banks collapsed
and depositors lost their homes,
businesses, and life savings,
the public lost confidence
in the banking system The
response was the creation
of the Federal Reserve System,
the Fed is the central bank,
which would become responsible
for overseeing monetary policy,
establishing interest rates
on government lending,
and providing the safety net of
support during times of stress,
as well as providing regulatory
oversight of the banks.
And then, in 1933, the
Glass-Steagall Act was created,
and this is where
there was a separation
of commercial banking
activities,
these deposit-taking, lending,
fiduciary custody of funds
from principal risk-taking,
capital creation,
stocks and bond trading
activities
of the investment banks.
At that particular
time, many people felt
that the commercial
banks being involved
in those risk-taking
activities was a causal factor
to the Great Depression,
and thus,
the SEC was the oversight
regulator
to the investment banks.
Then in 1938, Fannie
Mae was created,
the Federal National
Mortgage Association,
to encourage greater
home ownership,
which was a good thing, making
mortgages available to low-
and moderate-income families
by purchasing from banks
and guaranteeing them through
the secondary mortgage markets.
But in 1968, Fannie Mae became
an independently publicly owned
company who now could
buy any type of mortgage,
not just government-supported,
as they were originally
conceived.
And then in 1970, Freddie Mac,
Federal Home Loan Mortgage
Corporation, was founded,
as a government sponsored
entity.
Also independently publicly
held, and they typically bought
and guaranteed mortgages from
smaller banks and thrifts
and provided market
competition for Fannie Mae.
Now both of these
companies had gerrymandered
government oversight.
They did have fiduciary --
banks, boards of directors that
had fiduciary responsibility,
but they had congressional
oversight, housing
and urban development
deployment quotas to fulfill,
oversight by the
Office of Housing
and Enterprise oversight.
The Office of the
Controller of the Currency,
the Treasury Department.
They to follow SEC accounting
rules, and behind the scenes,
the Fed always had a
design on oversight,
and an ideological problem
with their existence,
and as we learned, as we
got into it, those feelings
and thoughts were very
intense, and actually
in some instances,
quite personal.
Then in 1974, the Employee
Retirement Income Security Act,
ERISA, came into being, which
set rules for fiduciaries
to present misuse
of pension plans.
So, as companies like
Fannie Mae and Freddie Mac,
and the bank were
growing and, expanding,
institutional investor
activists started to clamor
for greater stock performance,
resulting in quarterly
earnings performance scrutiny,
which caused greater
short-term decision-making
and expansionist
risk-taking moves on the part
of the managements
of those companies,
in order to increase their
-- the value of their stock.
In '77 the Community
Reinvestment Act was established
to encourage commercial
banks and saving associations
to help low- and
moderate-income families
to more easily develop
borrowing and mortgages by low
to moderate income families.
During that period of time,
in order to comply with some
of those regulations,
there was a compromising
of traditional credit standards.
In 1992, the Housing Community
Development Act arrived,
allowing HUD to increase quotas
on the subprime housing lending
of Fannie Mae and Freddie Mac,
which in the year 2000 reached
50% of all of the mortgages
that those institutions
were raising.
That was done by quota.
It was a government-ordered
kind of thing,
and I will tell you
just on a personal note,
it was one of the first
board meetings I attended,
and I remember the CEO
of Freddie Mac getting up
and saying to the board.
"Look, we do not think that
this is the correct thing to do,
because in order to
comply with those quotas,
we're going to have to end
up marketing these securities
to people that should
not, you know,
have the securities
in their hands.
We don't know what the
ramifications of that are going
to be, but we're going to
take those ramifications,
because we don't think
it's the right thing to do.
Then in 1999 the
Gramm-Leach-Bliley Act came
into play, which
eliminated the separation
of investment banking
restrictions
on commercial banks, allowing
banks to compete again
with Fannie Mae and Freddie
Mac for the securitization
of mortgages as well as the
other investment banking,
risk taking activities.
Now alongside these social
and regulatory monetary
policy shifts, over time,
the financial service
industry was evolving, as well.
A move away from the
problem-solving advice
on strategic and capital raising
moved more towards the trading
environment, including
the expansion,
some would say the explosion
of securitization, particularly
as credit instruments,
like mortgages.
These instruments were
supposedly tradable.
And compounding that problem,
there was a proliferation
of the predominance of
marketable obligations,
CDOs and other kinds
of contrived sort
of investment options for
the fixed income market.
And the result of that was the
credit crisis was much more
readily contagious
around the globe,
because of the existence
of those securities.
It became more difficult as
the markets became more opaque,
with the financial system
expanding and more complex
and more interconnected
than ever before,
through counter parties,
global counter parties
that were really new on the
scene in the utilization
of these securitized
investments.
So, simultaneously, with
that, you have the expansion
of the fixed-income and
equity commodity side
of investment banks, as well as
the move toward globalization
and principal investing brought
greater demands for capital,
which drove the heretofore
private partnerships
where their own capital
was at risk,
to become public
companies, and now captive
of the shorter-term
results demanded
by the institutional
investors governed
by the ERISA obligations.
The traders of those
organizations started to grow
in power within those firms,
and they became the leaders
of those institutions,
bringing a shorter-term
transaction-oriented
market-to-market view
of the world rather than
the longer-term relationship
problem-solving, sort of
statesmanlike advice approach
that the traditional
investment banks
and commercial bank leaders
had done in a previous era.
The boards of directors
and regulatory agencies
and rating agencies, in many
instances, lacked the knowledge
and experience to accurately
assess the risks involved
in the proliferation of many
of these complex products.
Plus, in some cases, found
themselves conflicted
by the loyalties to
their constituencies
and the competitive
aspirations and the demand
of their shareholders
over that period of time.
The Fed, in particular, during
this period in the early 90s,
start to ease monetary policy
and actually exercise
the lighter oversight
on the commercial bank because
of their new-found powers,
which they were encouraging,
and therefore,
unwittingly contributed
to the environment
of exaggerated trading.
All these factors started
to come together
in the early 2000s.
First when Fannie and
Freddie found themselves
in the accounting scandals,
ironically for absolutely
opposite reasons.
They shook the confidence
of the stock market in both
of those companies,
and both companies came
under intense pressure from
the government, at that point,
to spur the growth
of the housing while
confronting intense regulatory
and political oversight.
Both companies sought to
bolster their equity capital
as the value of the housing
stock started to go down
and market-to-market accounting
provisions required them
to write down loans, and the
assets on their balance sheets,
making financial, conventional
financing problematic.
When the political
considerations came into play,
leaving the market
questioning the viability
of the implied guarantee, which
had persisted from the founding
of these institutions,
the stock market --
the stock in these
companies absolutely tanked.
You know, because the government
didn't work with the companies
and the boards of directors
to work the problem,
because they unilaterally
had decided to go
down the conservatorship
rule, it was so wrenching
to the equity market
it further contributed
to the downward cycle
and the loss of trust,
and it actually reduced
the ammunition available
to the government in dealing
with some of the other problems
that they were confronting,
and fear took over the markets,
and the rest is real history.
And so, from my standpoint,
that is the evolution
of what happened.
Now this is story of
unintended consequences,
violation of basic principles
of standards of excellence
in governance, lack
of communication,
a lack of foresight,
political infighting,
a lack of honest
learning and reflection,
and a lack of accountability on
the part of many, many leaders,
and as we go into the Q
and A and the discussion,
I think we can get into the --
some of the more
specifics of that.
>> Amy Friend: That was
some amazing history.
I'm not sure I agree with
all of it, but I'm going
to move forward and talk about
the congressional perspective
when the crisis hit,
and thank you,
Cathy for bringing us together
in our different perspectives.
I think it will be an
interesting conversation.
So, when the financial
crisis hit hard,
and you've heard the lead up to
it, and there are many events
that foreshadowed it,
including the crashing
of the mortgage securities
market in August 2007,
the government swung
into action.
Not always consistently
but boldly
and in unprecedented ways.
And there were many government
actors, as you heard from Geoff,
who had pivotal roles leading up
to and dealing with the crisis,
but I'm going to focus
on Congress's reaction,
because that's where I
had a front-row seat,
having been the Senate,
the Chief Counsel
to the Senate Banking
Committee during the crisis,
and I want to talk about
to critical responses
to the crisis.
That was the Emergency
Economic Stabilization Act,
which created the Troubled
Asset Relief Program,
and then Dodd-Frank.
So exactly 11 years ago today,
on September 17, the chairman
of the Federal Reserve Board,
Ben Bernanke, and the Secretary
of Treasury, Hank Paulson,
requested a meeting
with the leadership of the
House and Senate, and they met,
and that was then
Speaker Pelosi's office.
And they told the
assembled leadership
that the US economy was
on the verge of collapse,
and that if Congress does not
act with an overwhelming show
of support for the
financial services --
for the system, then
we would have something
that exceeded the problems with
respect to the Great Depression,
that would be more
of a magnitude
than the Great Depression
with global implications
that we really didn't
have in the 1920s.
So, congressmen and
senators were shocked
when they heard this, right?
They could see -- they knew
that things were going south,
but they had no idea that it
had reached that critical point.
They were told they had one
week to provide $700 billion
in assistance to the
Treasury Department
so that the Treasury could
actually purchase these bad
mortgages and mortgage-backed
securities
that they said were clogging
the plumbing on banks' books
and preventing banks
from trusting each other
and seizing up lending.
So, let me just set
the stage for this.
This was September
of an election year,
a presidential election year.
This was President
Obama's first term.
So, election -- it was a
race against John McCain,
and everybody knows
in Washington the conventional
wisdom is you cannot get any
meaningful legislation passed
in this critical time period
because partisanship
is even more prevalent
than it usually is.
George Bush was the
Republican president
with an all-Democratic
house and Senate,
and it was an incredibly
scary time.
So, very few experts in
this area in Congress,
and we could all just watch
CNBC with the sort of, you know,
sharks circling the
next company,
the next weak company
that was going down.
So, by then we had
Bear Stearns collapse,
which was a big investment
company, investment advisor,
and we had AIG Insurance
Company that was going down.
And Lehman Brothers
was allowed to fail.
So, some companies were sold.
Some companies failed, and I
think the market and members
of Congress really didn't
know what to make of it.
So, members of Congress believed
they had to act in order
to forestall ruinous
consequences for the country,
and the question becomes
how did a bill aimed
at saving the American economy
become so wildly unpopular?
From the start, constituents
were overwhelmingly
against the bill, and they were
phoning in to their members
of Congress asking them
to vote against the bill,
but members of Congress
believed they had no choice
but to support the bill if they
wanted to prevent the economy
from plunging into
the very depths.
They believed what they were
told by the Treasury Secretary
and the Fed Chairman,
who had been a student
of the Great Depression,
that the best way
to keep Main Street going
was to keep money flowing
to MainStreet was to
prevent the collapse
of the giant institutions that
had contributed, in some form
or another, to the crisis.
So, why couldn't
Congress deliver a bill,
a better bill you might
say, for consumers,
one that actually
had the support
and got their confidence?
I think three factors
worked against the Congress.
One was the need for speed.
So, they were given one
week to do something
that normally Congress
might take years to do,
and they did so within
two weeks.
So, I remember at that time
I got very little sleep,
and I often was driving
home when the sun was rising
to get an hour's sleep
and take a shower.
There was no time to conduct
hearings and really deliberate
and hear from constituents and
hear from different groups,
hear from lobbyists, hear from
consumers, hear from industry.
It was something that had
to be done very quickly.
Complexity is the second.
So, speed is one.
Complexity is the other,
the system was wildly
interconnected.
Giant companies were really
falling like dominoes.
Few in Congress have the
expertise in financial services
or had a good handle
on what was unfolding.
So, they really had to
rely, to a great extent,
on those who had expertise
like the Treasury Secretary.
It though even this was
brand-new ground for him, right?
Most people were not
alive who had lived
through the Great Depression.
So then, the third was Treasury
Secretary Paulson's ideology.
He had been a former
chairman of Goldman Sachs,
and he knew the markets,
and he insisted that CEOs
of these big companies,
of these big banks,
would not take any assistance
from the federal government,
if any conditions were attached.
And he was so convinced that
they needed to take assistance
to restore faith in the
financial services system.
So, he said no conditions
attached,
and members of Congress
argued vociferously
against that narrative, saying
that they could not go back
to their fellow members
or their constituents
and say we just gave this
free pass to this industry.
So, they fought for and won
limits on executive compensation
of senior executives
in companies
that took assistance,
federal assistance.
Warrants so that taxpayers
would actually get the upside
of these companies ever
became profitable again.
Nobody really knew.
Foreclosure assistance,
you heard Prentiss say.
There was a huge foreclosure
crisis, but even that met
with some resistance within
Congress, where some members
of Congress said, but
that's moral hazard.
We have constituents who
have paid their mortgages.
Why should people down the
street or in the, you know,
next congressional district,
why should they get bailed out,
when these folks didn't?
So, many of these points
that foreclosure
assistance was there.
That there was a limits on
executive compensation, etc.,
were lost on the public.
All they heard was this is
a bailout it's a bailout
of companies that, again, had at
least some role in the crisis.
Today, I highly doubt
that Congress would pass
anything like TARP again.
I think members of
Congress lost their seats.
I think a lot of the anger that
we feel today was fulminated
by the crisis and the
perception of a bailout,
but I am also convinced that
if Congress did nothing,
the American public would
have suffered terribly.
I don't believe that we would
be at 3.7% unemployment now,
it was 10% then, and
it would've gone up,
and most economists believe that
the TARP was very effective,
along with a number of things
that other government
agencies did.
So, Congressman Barney Frank,
former Congressman, likes to say
that TARP was the most wildly
unpopular highly successful
major program that actually,
I think, did have a big role
in saving the economy and
returned money to the taxpayers.
So, now let me just turn
quickly to the Dodd-Frank Act.
So, you have heard from both
Prentiss and Geoff about some
of the staggering
consequences of the crisis.
Millions of people
lost their homes,
millions of people lost
their retirement savings.
Millions of people lost jobs.
It really was staggering,
the government provided not just
the $700 billion of assistance
from Congress, but
literally, trillions of dollars
in assistance in one form
or another from the FDIC
and from all of these programs
that the Fed had actually set
up to help the industry.
It was just, I think,
inconceivable
that any single member
of Congress might think they
didn't have to deal with some
of the underlying
structural problems
that led to this crisis.
The group of 20, which
is a group of countries,
major countries, had gotten
together in November 2008,
soon after the crisis, and
they agreed on the causes.
They said it was these
bigger macroeconomic policies
that created a lot of easy
money that was looking
for higher returns
on their assets,
coupled with the
weak underwriting,
which you heard about.
These opaque financial
instruments called credit
default swaps, which let
companies hedge their
risky best.
The risk management practices
that were fueled by some
of these credit default swaps.
Excessive leverage where the
companies didn't have enough
capital to meet their
obligations.
Policymakers and regulators
that were kind of asleep
at the switch but didn't see
the risk that was building
up in the system
or understand some
of these financial innovations.
Okay, those were the causes,
and they actually came
up with solutions, too, that
all of the governments agreed
that they would work
to implement,
and that included
better consumer
and investor protections.
All you had to do was see
this mortgage crisis to know
that consumers were given
something that was exploding.
Basically, it was exploding.
Basically, it was a
ticking time bomb.
They said you needed expanded
regulation over these actors
that were never regulated
to begin with.
Transparency around these
complex instruments,
these derivatives, better
risk management, more capital,
a regime to actually unwind a
company like Lehman Brothers
that failed that was
put into bankruptcy,
but bankruptcy was
never adequate.
So, come up with something
new so you can let one
of these companies fail
without bringing down the system
and strengthen regulation
of credit rating agencies
that took a lot of
these junk bonds
and gave them the
highest ratings.
Okay, Dodd-Frank
and the legislation
from its very beginning
contains all of those elements,
and yet passing Dodd-Frank
in the Senate
to not a single vote to spare.
So, it was 60 votes that was
needed to overcome a filibuster,
and 60 votes that were
garnered, and that was it.
So, briefly, what elements
conspires against Dodd-Frank?
This is what Cathy
wanted me to think about.
What were the constraints
that Congress placed?
I think there are four.
Two of them are the same
that they faced in TARP.
One is complexity.
The crisis had -- you heard
Geoff and Prentiss talk
about there were a
myriad of causes.
There were things that
built up over many years.
And so, it was myriad causes
that defied a simple solution.
No simple solution.
Second, the industry had
created a lot of the complexity.
These credit default swaps are
a way to help them manage risk,
which turned out to
just concentrate risk.
These incredible
interconnections amongst these
big companies that they didn't
even understand themselves
or the extent of the
affiliates that they had
within their companies,
and the risks
that they were taking
on and spreading.
I think few had any
understanding of that.
The third was the regulatory
regime in the United States is
so incredibly stratified
and complicated,
and you may not have paid
attention to Geoff's slide
on Dodd-Frank and all
these little bubbles
of all these different
obligations that are --
were put upon a number
of different regulatory
agencies, but you know what?
Dodd-Frank inherited
most of that.
And when Senator Dodd tried
to streamline just the banking
regulators, there were four
at the time, plus 50 state
regulators, it had no traction
because they were too
many interests invested
in the status quo, both amongst
the regulators and industry.
And I'm convinced that when
the public isn't educated
about something, like they don't
know how the whole regulatory
system works, then it means
that entrenched interests
tend to win out.
Okay, so complexity.
Speed. I think members
of Congress realized
that if they didn't act
within one Congress,
that the opportunity would be
gone, and memories are short.
They already are.
Cathy said this happened
a long time ago.
To me, 10 years is like nothing.
And we're already, you know,
deregulating, and I think a lot
of people have forgotten we
ever went through this crisis.
So, finally, I think money
and access had a lot to do
with responses, and made
it so difficult to pass.
The Center for Public
Integrity said
over 800 organizations were
lobbying on financial reform,
and it wasn't to pass the bill
for the most part and spent
over a billion dollars, and
that doesn't count the millions
of dollars that -- in
campaign contributions
to key members of Congress.
And there was a point
where threatening
to kill the bill was actually
a great way to make money.
So, the final thing I'll point
to is what I think was
a lack of leadership.
I do think the bill
sponsors, Dodd and Frank,
were exemplary leaders who
understood their bodies and how
to get something passed and did
so particularly in the Senate
at great odds, but I
think partisanship ended
up trumping what I would
say is the patriotic duty
to move forward with a solution.
The leadership in Congress
never prevailed on the banking
or financial services industry.
The very companies that
took a lot of the money,
the federal assistance, to
come to the table and engage
with members in a
constructive way
to find a reasonable
path forward,
and I would say the industry
leaders never got together
in a constructive way to demand
that Congress work together,
Republicans and Democrats, to
find a clear solution forward.
So, against this backdrop,
finding a middle ground
was incredibly difficult.
Given so many things
working against the bill,
it's incredible that it actually
passed, and I would say,
I think, it's worked
pretty well.
And so, despite all odds
and all these constraints,
we moved forward, but it
shouldn't have to be this hard.
I think there was a response.
I think that the core elements
of Dodd-Frank are quite good,
and those are the ones that
the group of 20 agreed to,
but it should never have
been that hard to pass.
>> Cathleen Kaveny: Well,
thank you all very much
for just fascinating
vantage points
on with an enormously
complex problem.
I'm just going to ask a few
questions that I think are --
they're not meant to be
technical, they're meant
to be just a little bit more,
you know, basic, try to bring
in some of the moral and the
political and the, you know,
the normative into this
multifaceted crisis,
and I guess the first
is more for you,
Prentiss, but for everyone.
One of the things
that we don't agree
about in this country is
what the purpose of law is.
You know, especially law
that engages consumers.
Is the purpose of consumer
protection law meant to be
to protect consumers from
outside influences from fraud,
duress, undue pressure?
The sorts of things that
can invalidate a contract,
or is it also meant to protect
them, in a way, from themselves.
You know, so many
of these, you know,
the subprime mortgages involve
a combination of pressure,
but also of people wanting
things that maybe, you know,
were beyond their
capacity to afford.
How do you balance
protecting people
but also honoring
autonomy and responsibility
in setting regulation?
>> Prentiss Cox: Okay,
two minutes, all right.
We already have a structure to
contain fraud and deception.
We have the general
principles of law that do that.
I would reject the underlying
premise of your argument,
as it applies here
and more generally.
It's just not my experience
with what happens with people.
Let me talk about how
these mortgages were sold,
and I think that will
answer the question better.
If you're somebody who's there,
these mortgages were sold,
not sought out, generally
speaking,
and that was particularly true
in that period of 2001 to 2005
where the crisis was
building so substantially.
The homeowners with equity
in their home were targeted
by the subprime companies and
were aggressively telemarketed,
even door-to-door
knocking, and they were sold
and they were told the number
one pitch you hear over
and over again, is here's
your overall monthly debt,
and if you enter into this deal,
we will lower your
overall monthly debt.
This idea that people were
getting these to build next
to room and a swimming pool.
Actually, some of
that happened --
a lot of what happened
was investors doing
that in a fraudulent way
that wasn't controlled.
When we're talking about
the average homeowner,
the typical homeowner
got a refi loan
that someone aggressively
sold to them
and told them it was
financially prudent,
and the instrument itself
was incredibly complex,
it had an interest rate period.
The disclosures were
misleadingly sold, and it looked
like they were getting
a better deal.
The fault of the homeowner was
not being sophisticated enough
to see through that
and resist it,
but that's not really a fault.
I mean, they were told,
basically don't trust anyone
that comes to your door
would be the answer to that,
and that's destructive
of our markets
as well as our communities.
So, my experience in this
field rejects that premise.
I don't think that most
people are irresponsible
and profligate and all of that.
I think that they live
in a complex world.
They're asked to make
incredibly complex decisions
that most people don't do on
their jobs, unlike maybe us,
and I don't think
that most homeowners
and most consumers are
greedy, terrible people,
and I think the point of
consumer protection law is
to make sure that we have
products and services
that actually appear
to be as their sold,
and that wasn't the
case in the crisis.
I hope that wasn't too much.
>> Cathleen Kaveny:
No, thank you.
Any other comments on that?
Do you -- do either of you
two want to add anything?
>> Amy Friend: So,
I think there has
to be something beyond just
the you can't mislead somebody,
right?
I do think there has to be this
concept of suitability or things
like ability to repay,
which is now in the law.
Which is, you could
give the disclosures
about exactly what this
product does, but if you know
that the person cannot pay
back based on what they have,
why should we go ahead
and sell it to them?
And I do think we have the idea
of consumer from protection
in all sorts of products.
Financial services is another
product, and it's basic
and it's fundamental
and we don't sell dangerous
things like, I mean, toasters
and microwaves and
things that just
because we say these
things could happen, right?
If we know that they're
likely to happen,
they're not going to be sold.
So, I think it goes beyond just
you can't mislead somebody,
because a lot of the
disclosures are very opaque.
People don't necessarily
understand,
and I do think there has
to be some responsibility.
I also think it's better for
the financial system, right?
If banks and financial services
companies are selling things
like if their customers, if
they can't pay them back,
that's not good for
their customers.
That's not good for the bank.
>> Cathleen Kaveny:
Okay, thank you.
Geoff, do you have any?
>> Geoffrey T. Boisi: No,
I basically agree with both
of the comments that were made.
You know, there are -- you
have to look at the qualities
of the companies that were doing
it, and there clearly were --
there were companies that were
doing disreputable things.
The issue is, you know, what
is the oversight of that?
And you know, usually, when
you're selling securities,
you have to go through
licensing,
and there is an oversight
process to that.
Now, in the mortgage industry,
I'm not exactly sure what some
of the you know, specialized
mortgage companies,
what requirements
there were there.
I don't think there were.
You know, through the
traditional banks,
investment banks,
and what but not,
I don't that's where
the issue was.
I think the issue
was really, you know,
it was some of these
specific mortgage companies.
>> Prentiss Cox: Could I
just add one thing to that?
This is an example.
Early in the crisis,
like I said,
the first company
I went after FAMCO.
It's unbelievable, and where
did FAMCO get their money?
They got their money
from Lehman Brothers.
Lehman Brothers went
in and looked at FAMCO.
before they started
lending the money
and wrote a due diligence
memo, and in that memo it said,
paraphrasing, if we're going
to deal with this company,
we have to check our
morals at the door.
Well, they did, and they gave
them all the money they wanted.
This isn't a case of,
you know what I mean?
The money came from Wall
Street, which was not part
of the chartered bank
financial regulatory system.
It happened outside of that.
We let all of that happen.
In my opinion, in the name
of ideological reasons,
and we didn't see it.
We let this whole
world grow up outside
of the New Deal regulatory
system, which, by the way,
I'll add, worked for
about four generations.
We had a system that worked, and
starting in the 1980s and for
about 20 years, we destroyed it.
Our system did not
have these collapses.
They didn't have the S&L crisis.
They didn't have all this
financial panic and instability.
We had a system that worked,
and we made a political choice
to destroy it, and I think in
there is an important lesson.
>> Cathleen Kaveny: So,
Geoff, the next one's for you.
Most people don't know exactly
what goes on on Wall Street,
and they don't work on Wall
Street, but we have a lot
of movies about Wall Street.
We have Gordon Gecko who
said, "Greed is good."
And we've had a lot
of dramas about that.
Now there's two problems
with this, right?
One problem is that we have
people who are attracted
to the field who think, well,
maybe I want to be Gordon Gecko.
Maybe this is the way
I want to live my life.
Maybe this is a realistic way
to think about amassing money,
on the one hand, and then
you have the American people
on the other hand who
think that the story
of the collapse is really almost
like a, you know, a telenovela,
which is about, you know, clear
villains and clear heroes and,
you know, a bemused Greek
chorus that you warning everyone
to avoid these failings.
How do you think you go about,
or how we could go about,
you could go about, encouraging,
you know the pursuit of success,
obviously on Wall Street but
also integrating the values
that you talk about,
you know, integrity,
honesty, responsibility?
That's one question
and how do you get
across to the American public
that these movies really are
just a very simplified vision
of how a great financial
crisis can come about?
>> Geoffrey T. Boisi: You know,
as I've said to you privately,
I mean, I find it
abhorrent that, you know,
financial services industry
and businesses is exemplified
by the Gordon Geckos
of the world.
That, to be honest with you,
has not been my 50
years in business.
And you know, fundamentally,
whether it's a financial
services institution,
a business, government,
university, or whatever,
it's the leadership
culture that is developed
within the organization
and how one does that,
and I think that's where the
violation really took place,
you know, throughout the
system, to be honest with you.
And you know, my experience is,
those firms that are
high-quality firms
who do a good job, have --
operate by a standard of
excellent in building a culture
which basically has a
defined mission statement.
They, you know, it's
usually based
on providing the highest
quality and services
or goods they can find.
The client's interest
comes first.
There's a commitment to
integrity, say what you mean.
Mean what you say and
do the right thing,
and we used to spend an
enormous amount of time
at management committee
meetings, both at Goldman Sachs
and at J.P. Morgan when
I was there and at any
of the institutions that
I've been involved in is
to what the right thing is.
What is the greater good?
Is this going to harm anybody,
including us reputationally,
or harm anybody in any way?
And how does this solve
the problem for the client,
and that's what most of
the focus was put on.
And then there was a
commitment to excellence,
where there was rigor in there
was reliability, and typically,
there was a compensation
system that was set
up to reinforce the behavior
that the leadership wants
to have, and then there was a,
not only governance structure,
but a evaluation system
to make sure that those --
that mission in the core values
of the organization
are reinforced.
The organizations that I was
involved in, we spent most
of our time focusing on that,
I will tell you, I said before,
I was part of the Freddie
Mac, and it was the, you know,
the reformation of Freddie Mac
after it had the
accounting scandal.
And the guy who's been
vilified throughout the years,
the one name mentioned his
Dick Syron, who as the CEO,
and he was the guy that
I was mentioning before,
who stood up in front of
the board of directors
and basically said we're
not going to do this,
and I don't care what they do to
us, and I hope you're with me.
And he tried to design a culture
within that organization
to bring it forward.
So, I think the focus on
how you develop a culture
of honest excellence is really
the issue, and I think a lot
of organizations try to do that,
but there's no question there
were a bunch of bad actors.
But my experience over the
50 years was never sitting
around with organizations
figuring
out how we can take
advantage of somebody.
>> Cathleen Kaveny:
Any other comments?
>> Amy Friend: The only
thing, I completely agree.
I think culture is hugely
important, and the Group of 30,
which is an organization with
different countries represented
and a lot of central banks from
around the world, they've looked
at banking conduct and culture
leading up to the crisis,
and they've concluded that
culture is so important,
including accountability
throughout mid-level management,
etc. But one of the things
they point out is the need
for diversity in
decision-making,
and I think that has
largely been lacking in a lot
of these big companies, which is
that you can't just
have a homogenous group
that becomes an echo chamber.
They're very confident
in decision making
because people tend to agree,
and that when you have
more diverse leadership,
people who are making decision
throughout the company,
you end up hearing
different voices, and you tend
to have messier decision-making,
but one that is much
more informed.
So, I think that's something
that companies now are really
paying attention to and looking
in terms of minority
and gender diversity.
I think that's going to an
important part of solution.
>> Prentiss Cox: In
addition to that,
I would say that the checks and
balances that are developing
and are being more
readily adopted.
You know, having an independent
lead director, I think,
is an important, constructive
thing, and to have people
on the boards who are
not beholden to the CEO
of the company, and
the compensation system
for board members should be
looked at pretty carefully,
in order for them not to, again,
be conflicted by the, you know,
by the compensation that
is recommended by the CEO.
>> Cathleen Kaveny: Thank you.
I'm going to start with
you, Amy, for this one.
Just, again, a lot of my
knowledge is coming, you know,
very recently and also from
some of the films about this,
but one of the things that's
come up both of the scholarly
and the popular analysis of
the situation has been the,
kind of the relationship between
Wall Street on the one hand
and the regulators on the other.
On the one hand, it seems as if
it's been almost too distant.
The regulators didn't get a
good grasp of what was going
on until it was almost too
late, and on the other hand,
it was almost a little bit too
cozy, where some regulators,
perhaps, and some rating
agency employees, you know,
didn't want to really challenge
some of the bad behavior
that was going on because
they had their own interests
in maybe one day being
employed by Wall Street.
Do you think we've got a
better balance, a better set
of relationships between Wall
Street and regulators and,
you know, rating agencies
now than we did back then,
and if not, what would you
want to do to improve it?
>> Amy Friend: So, I don't
know whether I would blame the
crisis, at least in part, on
regulators being too distant.
They just -- I think they
were reluctant to act,
and part of the problem is,
one they may not have
understood everything,
I think the industry was far
ahead of the regulators in terms
of financial innovation
like credit default swaps.
Nobody was really understanding
that, but there are so many,
at least in the banking area,
there are so many regulators.
There are four of them that were
in existence before Dodd-Frank.
Now there are three, and they
like to act by consensus,
and I know that they
saw what was going
on with the mortgage crisis,
and I know they started
with some guidance, but they
wanted all four agencies to get
on board so that the
banks that were regulated
by one would not be seen as
having a competitive advantage
if they weren't subject
to that guidance.
So, I think part of the problem
is, that we sought leading
up to the crisis and
regulatory arbitrage
where certain companies
were looking
for less restrictive regulators.
So, I think that's a problem.
And there's definitely
some concerns
that the regulators
are too close, right?
It's a remove human nature if
you spend a whole lot of time
with certain people,
you get to like them,
and you don't necessarily want
to do things that
they don't like.
But clearly, the best role for
the regulator is to be somebody
that can look objectively.
Can also provide
advice, but you have
to call the shots
when you see it.
So, has that changed?
I don't really know.
I'm not really sure.
>> Geoffrey T. Boisi: I
think you need character
and competence in a combination.
You know, my observation
was, to be honest with you,
going through the crisis period.
There was a bit of a
cookie-cutter approach
to dealing with each
of the companies,
when each of those financial
institutions were very different
financial institutions
and should have been dealt
with in a slightly different
way, not in a cookie-cutter way.
And part of the problem was that
there was not enough knowledge,
specific knowledge, about
the operations of some
of those businesses, you
know, by the regulators.
And so, but, just like on
either side of the fence,
I think you have to find
people of competence,
but also of character, and those
are the people that, you know,
should be chosen
to do those jobs.
>> Prentiss Cox: I see it
from a political power
structural problem.
So, you have on this chart
in front of you this CFTC.
The CFTC tried to regulate
derivatives way back,
10 years before the crisis, and
they were shut down politically
from doing that because
we have a system
where people can buy
political influence,
and the financial services
industry shut them down.
It would've made a huge
difference in the crisis.
The banking regulators --
Amy, you can bite my head
off at this if you want.
We don't have on their the OTS.
They got the death
penalty in Dodd-Frank
and it was -- oh is it on there?
>> Amy Friend: I don't
think they have that.
It's not up on the screen.
So, they're not seeing
what you're talking about.
>> Prentiss Cox: It
no longer exists.
It got the civil death
penalty for good reason.
Because the OTS was out there
basically selling itself
of the arbitrage, as
Amy was mentioning.
But I want to go after
Amy's group, as well.
The Controller of the
Currency, the OCC, went out
and said we have a
structural problem
with our banking regulators.
They get over 90% of their money
from their regulated entities,
but the regulated
entities get to choose
who their regulator
is, essentially.
They can charter as
federal or state.
They used to be able
to charter as a --
so you had the OTS
basically saying "Come to us,
and we won't regulate
you as much."
And you have the OCC hawk
actually saying, "If you come
to us, we'll stand between you
and those pesky state
Attorney Generals
that will go after
you for fraud.
They're literally
saying this to the banks.
It's a reason to do.
So, we have political and
structural problems here
that can be solved by
developing politicians
and electing politicians
who are committed
to a public interest
restructuring of the system
as happened in the New
Deal and did not happened
in response to this crisis.
>> Amy Friend: Right, and I
would just say I'm not going
to bite your head off because
I do agree with the arbitrage
and the first bill that Dodd put
out actually would have taken
on directly that problem
amongst the bank regulators,
and it is true that when you
have one bank regular depending
upon assessments on institutions
and the other two that aren't,
it does create some perverse
incentives, the other thing is
when you talk about
competence, Geoff,
I completely agree with that.
You know, regulators
pay a fraction
of what the industry does,
and so, a lot of people,
just for compensation, are going
to go to the industry and not go
to the regulators, and the
regulators have a constant need
to keep up, and it's very
difficult to do that.
>> Cathleen Kaveny:
Great, well thank you.
I'd like to -- we've got a--
>> Geoffrey T. Boisi:
I should just say,
but there should be a much more
coordinated regulatory system.
>> Amy Friend: I
completely agree.
>> Geoffrey T. Boisi: You
know, to be honest with you,
from a practical standpoint,
at one point, at Freddie Mac,
almost 50% of the
time of every employee
of the firm was responding to
a different regulatory request,
and some of them
were duplicative,
and some of them
were contradictory,
and it was just incredible
to the point
where we were finally saying,
look, this is so out of hand.
Why not just have the Fed be the
oversight, because they seemed
to have the, you know, in a way,
the most experienced, you know,
regulator during
that period of time?
>> Prentiss Cox: Just
this much, just a point.
I appreciate that.
Just a point.
Fannie and Freddie were
set up in the 1960s and 70s
as public institutions, and they
were privatized over 30 years,
and that was political decisions
that led to certain choices
about what that made
our regulatory system.
>> Cathleen Kaveny: Okay,
well, we've got time for one
or two questions
from the audience.
>> John Haskell:
Really quick questions.
We may only have time for one.
We'll go to this lady here.
>> Female: Thank you
for your insights.
Why was nobody ever brought
to justice or court or tried
to for all of these
fraudulent practices?
>> Prentiss Cox: Well,
I'm going to answer that.
Actually, right, I'm going to
actually defend, a little bit.
What I think was the
problem is we went
after the low dogs, right?
The people who were brought
to criminal prosecution were
like the mortgage officers.
Oh, come on.
You know, they never should've
gone after those people.
It was difficult to go
after the people at the top.
I didn't have to make those
actual criminal prosecutorial
decisions, but I think it
would've been difficult
to bring those cases.
So, I'm not going to
pummel people as much
about not bringing the cases.
I'm going to back it up and
say that the criminal --
it shouldn't have been on
the criminal prosecutors.
We made choices about how
we structured our system.
People acted within
those systems,
and getting to the people at the
top maybe should have been done
that would have been
very difficult,
and we shouldn't have gone after
the little fish and pretended
like we were doing something.
That I disagree with.
>> John Haskell: One
more quick question.
>> Female: Yeah,
you see parallels
to the student debt
crisis at all?
Or potential crisis?
>> Prentiss Cox:
I'm going to jump --
I actually work on student
debt issues, as well.
It is a very different market.
The problem -- the financial
crisis problem probably doesn't
exist on the student
debt side, because it is
over 90% federal money.
So, it's public money that goes
when the student
debt system goes.
Again, the problem with the
student debt is the misery
on the borrowers, and in
particular, we have that 10%
of the market that's private
student loans that were made
with almost no legislative
history in 2005.
My friend, Paul Wellstone, now
dead, fought bitterly against.
No bankruptcy discharge
of a private student loan,
and there's almost no
legislative history on that,
in my opinion, that
was a corrupt decision.
Again, the real problem with
that is the consequences
for actual human beings.
It's going to play
out will differently
at a systemic level
in my opinion.
>> John Haskell: Well, we're
going to wrap it up there.
Join me in thanking Amy, Geoff,
Prentiss, and Cathy and --
[ Applause ]
