Audit Interview: John Ryan

"There was an even bigger story here about how money and influence shape policy"

Many in the press believe they did a great job covering predatory mortgage lenders and their Wall Street partners in the run-up to the current credit calamity.

Us, we’re not so sure.

One person who tends to agree with our view is John Ryan, executive vice president at the Conference of State Bank Supervisors. During the bad old days of the mortgage mania, Ryan spent hours on the phone with reporters trying to sell them on the story of how lenders, Wall Street and captive federal regulators steamrollered state attempts to slow down the lending train before it wrecked.

The Audit talked to him recently about his experiences with the press and his impressions of the coverage. It was instructive, to say the least. Ryan applauded a Wall Street Journal story by Jess Bravin and Paul Beckett in January 2002 called “Friendly Watchdog: Federal Regulator Often Helps Banks Fighting Consumers”, but said the press mostly expressed no interest in what state regulators were trying to say.

The Audit: Tell me about some of the frustrations in trying to get your story out.

John Ryan: The frustration was not just getting the story told, but how it was told and what was being told. And by the “story” I mean that of evolving lending abuses, the states responses, and efforts to thwart that response. It was clear that a powerful industry was doing its best to eliminate all obstacles to a very profitable model of lending to vulnerable homeowners.

Perhaps the greatest frustration is that some federal regulators were working side by side with the industry to push aside state laws or enforcement efforts to address the sorts of abusive or unsustainable lending we were experiencing at the local level. It seemed outrageous to us that a regulatory agency could preempt these laws without any clear authority. I spent a lot of time talking with the press—first trade press and then national media—about this assault on consumer protection and federalism. But the federal regulators would tell them that nothing new was happening here, and the press wouldn’t challenge them on that. At best, it was treated as a “he said, she said” situation.

The one exception to that would be the front cover Wall Street Journal piece that described the Office of the Comptroller of the Currency as doing the industry’s bidding in overturning state consumer protection laws that the big banks didn’t want to comply with… But once that story was done, well it’s done. But that’s not the end of the story.

I’ve dealt with some really good journalists, but there was an even bigger story here about how money and influence shape policy and how actively they shape policy and are able to write the rules at the federal level to maximize their profit at the expense of consumer protections or even recognition of the democratic process. What concerned me was that this was not viewed as a news story. There was a cynicism I experienced with some in the press who expressed the view that this was just business as usual and how Washington worked. With others, they would be interested but said they couldn’t sell the story to their editors because there was no news peg. But the consequences were so serious.

I had a hard time understanding why the media didn’t easily see that a handful of financial institutions pulling the strings in Washington wasn’t in the public interest. In this case, that these institutions, working closely with their regulator through very creative lawyering and interpretations of law were able to overturn acts of elected officials in 50 states.

TA: Why do you think the press missed it or covered it intermittently?

JR: It’s complex. In litigation we often find that we need a really bad fact pattern — clear examples of consumer abuse — to succeed. I think the same was true of the press.

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?

JR: Absolutely.

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.

TA: What’s a story that you would want to read?

JR: The story that’s not quite well enough understood that’s so important to the American public and that is that the decisions being made now in addressing this crisis are going to result in more consolidation, with larger institutions that put us at greater systemic risk. In a sense the solution to the problem is rewarding those that caused it. They’ll be bigger and more influential than ever.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.