If we couldn’t give a list of aggrieved borrowers and clearly connect the dots that the story was a hard sell… So, for instance, when there was a borrower in New York who had been significantly overcharged on his loan went to Spitzer (and Spitzer sued it and confronted the federal government)… that, people could get and understand and that made a clever, tight story, whereas the sort of day in day out of how a very sophisticated industry with a lot of influence in a lot of corners basically got to write law and regulation the way they wanted was a less intriguing story. And in an environment of skyrocketing housing values many sins were masked.
TA: Was it possible to glean or forecast that some of these things could happen?
TA: So it was out there for people to put together? It wasn’t rocket science or something.
JR: I could put it together, and I’m certainly not a rocket scientist. It really requires a dedication to investigative reporting. The issues related to the unsustainable nature of this housing bubble, the sort of practices that it bred, how the role of Wall Street changed incentives and how the industry itself wasn’t sustainable — these weren’t secrets. However, they’re not easy to understand or to communicate. And it certainly doesn’t hang clearly on a news peg. To cover this sort of story well you need resources that can dig deep and have the ability to follow the story.
…I don’t come from the universe of sophisticated global finance, but I’ve been around the policy debate long enough to understand that there were significant risks here that were recognized back in the mid 90’s by all sorts of players and debated here in Washington, in terms of the risk of these complex financial instruments and the lack of transparency of the markets in which they were originated and traded.
TA: Regulation is dry; it doesn’t sell newspapers so it seems to me there’s not as much emphasis as there should be. Now clearly with what you have as a complete failure of regulation, now you have stories all over the place about this—after the fact.
JR: But what I still don’t think the media is quite capturing is that this is not a failure of our regulatory system. There were plenty of things in place in our regulatory system that could have addressed these problems. It was a failure of regulatory and political will. The willingness to address the problems in any sort of anticipatory way or that efforts to do so were challenged or blocked.
TA: Why do you think that was?
JR: That’s the simple story. Because some very influential interests were making a lot of money. That’s it.
TA: How big a problem were the abuses in the mortgage industry in the housing bust? People on one side saying Fannie and Freddie caused this…
JR: I don’t buy that. They contributed, but they were not the absolute root cause.
TA: But how much was straight-up fraud…
JR: It’s hard to measure, and we continue to redefine the fraud part, but some of it was just lending practices that were not sustainable and in the best interest of the borrower. States started going after this and started exploring a couple of different things. One—the notion of an ability to repay. That came out of the state settlements with Household and then New York law and North Carolina law and others started to explore that.
The other was, trying to hold Wall Street accountable for loans that were originated. That was the big issue over the Georgia Fair Lending Act that to me seemed a little too convenient that all of a sudden ratings agencies said they couldn’t rate these things. Somehow they could gauge the risk of these incredibly complex financial instruments and rate them often AAA, but without a limit on liability they were unable to provide a rating.
So my point is there were these things we were identifying that wouldn’t be pure fraud, but it was lending that was not in the best interests of the borrower. And that was a huge issue.