Gretchen Morgenson

Capitalists Who Could Wreck Capitalism, Part II

VTR Date: May 26, 2009

Gretchen Morgenson discusses America's corporate community.


GUEST: Gretchen Morgenson
VTR: 05/27/2009

I’m Richard Heffner, your host on The Open Mind.

And in a sense today’s program can be considered the second of a series we actually began two and a half years ago with Gretchen Morgenson, the New York Times widely read columnist and Assistant Business and Financial Editor, who won the Pulitzer Prize in 2002 for what the Pulitzer Board praised as her “trenchant and incisive” coverage of Wall Street.

Well, a great many hundreds of billions of dollars have literally gone down the drain, over the dam, up in smoke – call it what you will – since last we spoke at this table.

Wall Street has crashed … and with it the savings and pensions and hopes for the future of a great many Americans. Call it “recession” if you will; “depression” may better fit our national mood AND economy.

But, thanks to Open Mind Intern Zeke Eagan, I’ve gone back now and read dozens and dozens of Gretchen Morgenson’s New York Times columns written since she was here last time.

Ones with titles such as “The End of Banking As We Know It”, “Stress Tests Are Over, The Stress Isn’t”, “Red Flags That MUNY Investors Can’t See”, “AIG: Where Taxpayers Dollars Go To Die”, “The Worst Misstep: Geitner(CHECK SPELLING) Added To The Doubt”; “A Mortgage Paper Trail Often Leads To Nowhere” and so on and so on. And I could read from dozens and dozens of these titles.

And I wonder if my guest is once again going to pass her same surprisingly gentle judgment – not upon the corporate predators and their companies, and their non-regulating regulators … Lord knows she’s tough, tough, tough on them … but upon the system that spawned them all.

“I see sunlight up ahead…”, Gretchen Morgenson said to me last time. And I want to ask her how about this time?

MORGENSON: Well, there better be sunlight because we’ve sure been in a heck of a storm for … how many years … we’re in ’09 … more than two, almost three.

I don’t remember what sunlight I was seeing the last time we spoke, but gosh I sure would love to see some now.

HEFFNER: Well, the last time I was needling you, I was saying that here you saying that you are an ardent defender of capitalism, when time and time again … even since we were together on that program, you write stories that indicate that you couldn’t possibly believe in the system. Explain that.

MORGENSON: Well, I think that capitalism is a deeply flawed system. We have seen the flaws and the warts immeasurably since the subprime crisis burst on to the scene in early ’07.

But I think that we also have to concede, or I would certainly argue that capitalism is the best system that anyone who’s interested in trying to create wealth and that anyone who’s interested in spreading wealth would normally like to see. Would like to see capitalism in what I would consider to be the truer form than what we saw in this last go-round.

HEFFNER: What do you mean truer?

MORGENSON: A form that is, that is at least offset, or policed by regulators who have an appetite to regulate. Now we know that capitalism, if left alone, can destroy. Because that is what we’ve seen. We’ve seen it destroy … as you say … you know, people’s retirement accounts. The unfettered, unpoliced type of capitalism that we have just lived through is extremely damaging.

But I don’t’ think you can fully blame capitalism, you also have to blame the structures around it that are meant to reign it in.

HEFFNER: But don’t they …

MORGENSON: And we had none of that.

HEFFNER: Don’t they just grow up out of the soil of capitalism?

MORGENSON: The, the bad behavior?


MORGENSON: Certainly grows up. And again if left sort of unreigned in or un, un-policed or unchecked …and I mean by the press, by regulators, by capitalists themselves.

I mean I think that is the deepest question that we need to have answered. Why do these people who benefit so greatly from this system destroy it with their shortsightedness and with their greed?

We all know that greed and other human natures are as old as the hills. And are to be relied upon as never going away. Right? So what we have to do to protect ourselves against these ingrained natures is build a structure around it that at least checks some of these and provides some balance.

HEFFNER: You mentioned the press. Where was the press at fault?

MORGENSON: Well, I think that the press could have been more assiduous about questioning the conventional wisdom.

The conventional wisdom relating to the idea that homeownership for everyone was a good idea.

I mean there are people who just do not have the money to own a home. And it is a noble idea that everyone should be homeowners because there are beliefs that owning your own home in, increases prosperity. That it is an asset that will increase in value and therefore enrich you. That it’s something you can pass down to your, your children. That it is a way to make whole communities improve, if everyone is a homeowner.

You know I think that’s a noble idea, but I think we have seen in stark, real black and white here what happens when people who really can’t afford to be homeowners are put into homes in order for bankers to make immense profits from those loans, on commissions from those loans.

These people are put into homes that they can’t afford and then they’re pushed out of them in these dreadful foreclosure circumstances.

I mean nobody really questioned this idea or few people questioned the idea that homeownership was something that everyone deserved. No questions asked.

HEFFNER: Let me ask you something. Simple question. Why? Why didn’t the press, which picks up so many things on the attack, why did the press not … was it just too nice an idea?

MORGENSON: I think it was and I think that a lot of the proponents of the idea and we are talking about major corporations who benefited from it, whether they were home builders, whether they were bankers, whether they were Fannie Mae and Freddie Mac, which were government sponsored enterprises … with the idea of encouraging homeownership. You had policymakers making this argument, it was really across the board and it was always wrapped in the American flag. That homeownership was an ideal, you know like Mom, apple pie and the girl next door.

And so it was very hard to counter that, I think. And you, if you said, you know, a certain swathe of people really ought not own their homes because they can’t afford it, then you could be perceived as being elitist. I think that’s a major problem, that contributed to this.

HEFFNER: Well, let me ask this, as you analyzed, as an economist, as you analyzed what has happened … my assumption is and perhaps you can tell me that I’m terribly wrong here … that it wasn’t just a matter of people whose incomes were so low that they couldn’t afford homes … but rather that people who could afford homes, but who went in it whole hog … who went wild in this … and who were, not driven to this, but lured into this by our mortgage system.

MORGENSON: There were all kinds. There were the first time home buyer who were lured into it. A lot of immigrants to this country who, you know, had very low paying jobs, but who were told that they could afford the loan because the interest rates were so low, as you remember Alan Greenspan and the Federal Reserve Board lowered rates to 1% back in 2003, which really set off this entire race and this entire mania.

And so you had low, low rates and they lured people in … “well, look you can afford it … here, do the math … this interest rate is so low that you can afford to buy this home. And don’t worry, if rates go up … you can always refinance.”
Those were the arguments. For the, for the people who were really taking a chance buying a home because they could not really afford the, the monthly mortgage.

Now the people who, as you described, bought … went whole hog … bought too much house or bought a far bigger house than they could afford. They, too, were persuaded with the same argument …”you can always refinance, don’t worry, look at these low interest rates. Or low interest rates are here forever. These things are not going to go up. And worst case scenario … your home price will always appreciate in value. And so therefore you can sell it at a profit, if you ever get into some sort of trouble.”

HEFFNER: And what could the press have done about this?

MORGENSON: I guess they could have, you know, written thoughtful arguments, maybe exposed some of the mortgage lenders that were doing extremely dubious loans earlier on.

I mean we’d seen these loans that were really crazy, starting in 2004, 2005 and 2006. And don’t get me wrong there were people out there that were sort of lonely voices talking about this. And talking about predatory lending and there were consumer advocates and, and lawyers who were spotting these things and trying to work against the tide.

But there … it was such … they got such pushback from all quarters that it was very difficult for them to get any traction.

HEFFNER: Okay, we’re speaking together at the end of May 2009 … what’s going to happen?

MORGENSON: I think that we are in an interesting holding period right now.

HEFFNER: Interesting?

MORGENSON: Interesting because there’s a lot of hope that the worst is over and believe me we’ve been through a terrible period … bailouts … we’ve got bailout … I don’t know … a bailout a week last summer it felt like.

And hundreds of billions of dollars in taxpayer money that we may never see repaid. So, yeah, we’ve been through the mill here. And so, everyone is hopeful that we are … that this sort of stable period that we’ve been in recently means that we’ve bottomed and that things will start to climb again.

The economy will start to turn around, maybe unemployment stop … employment will start rising again … unemployment will stop it’s terrible increase.

You really see a, a sort of moment where maybe things are looking up.

HEFFNER: And these headlines that I read … piece after piece after piece. Critical … I was going to say “nasty”, I don’t mean that because they’re relevant and revelatory. Do you think the sort of thing that you have been writing about again and again … the bad stuff … is going to stop?

MORGENSON: Well, while we do have this hopeful period and this sort of stabilization going on …


MORGENSON: … I don’t think that we have seen the end of our difficulties … let’s put a nice word on it. Not so bad as “woes”.

But we have commercial loans that banks have made that have really only just started to go into default, or experience trouble. That’s an entire section of the real estate market that has not yet been hammered, as the residential market has.

You also then have consumer credit card debt, which banks loaded on to people during the credit binge, which is really what the home mortgage lending spree was all about. It was all a part of a very large, you know, assumption of debts taken on by consumers and corporations.

You have consumer credit card debt which has not yet really started to collapse. Those payments are still being made, you don’t see the defaults on those kinds of debts that you’ve seen on residential mortgages.

And you still see residential mortgage defaults increasing. So you sort of have three legs of this stool here and we’ve really encountered the worst of the residential perhaps.

But we have yet to see the worst of the commercial real estate and the consumer credit card debt problems.

HEFFNER: How deep will the consumer credit card problem be?

MORGENSON: The numbers are not as large as residential mortgages are. Because a residential mortgage covers most people’s largest asset.

HEFFNER: You … not as large …

MORGENSON: And many homes are, you know, million dollar homes, etc. …

HEFFNER: But as widespread.

MORGENSON: Very widespread. And you are going to see banks starting to cut back on their lending, of credit card lending because of certain “caps” that have been put on interest rates by Congress. You know Congress has seen that these things have … that credit card debt has really enslaved a lot of people. Now, of course they have to be responsible for taking one these credit cards. But the encouragement that they got from the lenders really was just beyond reckless.

People who were not making much of anything at all, you know, given tens of thousands of dollars in credit card balance that they could borrow. And then have to pay back these onerous, usurious rates.

You know it was a recipe for disaster and Congress has gotten involved and tried to put a cap on some of those rates and practices that were questionable and banks are going to now really start to see some losses.

HEFFNER: Okay, you say Congress has gotten involved. In your terms how successful will these Congressional efforts be? I’m not talking about committee hearings, I’m talking about bills passed and signed by the President.

MORGENSON: Well I think that the credit card bill that went through was the first effort and it was the first effort because it has been on the radar screen for a very long time.

There have been complaints by consumer advocates for years, really, about these abusive practices that lenders had. So that was really kind of ready to go, which is why, I think, it came our relatively quickly. And I think there’s enough outrage out there at some of the really questionable practices, that it was, you know, relatively easy to get through, although I’m sure the bankers were in there lobbying strenuously.

HEFFNER: Are you sanguine …

MORGENSON: As they always are.

HEFFNER: … that the major changes that needed to be made have been made and in the dimensions required?

MORGENSON: I think that it’s a start. I think that it starts to focus these banks on that there is going to be a consequence for the kinds of practices that are, you know, abusive, really.

For instance when a customer had maybe one late payment on one or his or her credit cards, all the credit cards would increase their interest rate. Things like that, that, you know, really just take advantage of a person in a way that is not, you know, what you think of as a good business practice. It’s a start …

HEFFNER: Excuse me …

MORGENSON: … it’s a start.

HEFFNER: … may I interrupt … when you say you wouldn’t think of “as a good business practice”. What do you mean by that … not as a legitimate or kindly … business practice. But it sounds like a very good business practice, if you’re measuring things by the bottom line.

MORGENSON: If you measure only on profitability, maybe it is.

HEFFNER: Well, in the capitalist system, what do you do, if you don’t measure by the bottom line?

MORGENSON: I think the best capitalists, the best corporations, the best executives, really try to balance more than just profit with treatment of their employees, their stockholders, obviously, are important, but so are other stakeholders … their customers.

That’s, I think, a model for capitalism that can work. Not this sort of profits-at-any-cost because we’ve seen, if nothing else, in this horrible period the cost of profits at, at no … with, with no consideration for anything else. Profits …

HEFFNER: Have we seen?

MORGENSON: Yes. Profits of mortgages that were given to people who could not afford them ultimately. Now we’re all paying for those bills. The shareholders certainly are paying the costs, but so are we all … all the taxpayers. Ditto for the credit card practices.

When we start to see losses from banks and credit cards, we’re all going to pay those. The bailouts that have been given to Citibank, to Bank of America. If we don’t get that money back, that will have been our cost … my son’s cost, children’s, grandchildren’s costs …going into future generations.

We’ve all seen the consequences of a, a sole pursuit of profits without any consideration for whether it’s right, whether it’s ethical, whether it’s moral … if we can’t learn from this, I think that it’s … ahh … I’m very hopeful that we can, let’s just say that.

HEFFNER: Okay, I, I get the point that you’re very hopeful, but then I think … I was reading from some of these headlines of the stories you’ve written … they date from January 22, 2007, when we did our former program to the present. But there are others, dozens and dozens and dozens of articles that you wrote from before that time.

They didn’t bring about the changes that one would have thought, so it took the kind of catastrophe that we’ve experienced and now are you sanguine that … I mean, what are you going to write about if we’ve learned this lesson that you think we have?

MORGENSON: Unfortunately, there will always be people, or fortunately, there will always be practices that are questionable that I can write about … I have confidence in that.

However, I think that if we can get it right this time, I am hopeful that the biggest, blue chip, most respected corporations that have really fallen down so badly in this episode, I would hope that they would want to dust themselves off, clean up their act and do the right thing, for all their stakeholders.

HEFFNER: I, I can hear the, the strings in the background. I can hear the music playing. And you really feel that they will? I know that you hope so.

MORGENSON: You know, one of the things that I try to do, when I write my articles is to shine a light on practices that I think are dubious. Because that’s the only way that you can really get the attention, perhaps, of regulators, that’s the way to get consumers aware of practices that are, you know, perhaps taking advantage of them.

It’s a way to kind of shame companies into doing the right thing. And I have no problem with that because I think shame is a very valuable pursuit.

HEFFNER: You think it works?

MORGENSON: And we seem … we seem to have lost a sense of shame in this country, as far as business practices were concerned. I mean I would have been ashamed to lure some, you know, person who’s first language was not even English into a mortgage that they couldn’t possibly understand, that had … that was punitive in certain aspects of it. That took their last nickel from them, so that I could get a commission, so that I could buy my Ferrari and my boat and my McMansion. I would have been ashamed to do that.

And I don’t understand how people sort of got lost in that, in that pursuit.

HEFFNER: You seem to be saying that they got lost in that pursuit because the press did not point the finger of shame at them.

MORGENSON: The press was one, one group that could have done better. But it is not the policeman for these businesses. Regulators were absolutely asleep at the switch, Dick. They were watching something else, or, you know, euphoric about home ownership for all, or being lobbied … I don’t know what it was, but their, their actual regulatory jobs were not being pursued.

There were actual laws on the books that would have required mortgage lenders not to do these kinds of loans or to make it clearer to people of the high costs associated with these loans. But there were very, very few regulators who were willing to police them.


MORGENSON: And so therefore they just went crazy and people did them to a faretheewell.

HEFFNER: Okay, you say “asleep at the switch” ..


HEFFNER: What put them to sleep?

MORGENSON: It’s very difficult to get inside people’s heads and to know what they were thinking. But you do know that there was an overarching view that regulation was bad, onerous, restrictive. That it was … that jobs would flee the United States to overseas if our regulations were too tight. That it was bad for business. That it would crimp profits and therefore, you know, jobs would be lost. That was the argument.

HEFFNER: Do you think …

MORGENSON: And to the degree that it … it was very pervasive, very pervasive.

HEFFNER: Do you think that the tragedy of the last year and a half has rid ourselves … rid us of that kind of thinking?

MORGENSON: I don’t feel that it has completely ridden ourselves of that thinking. I see too many people in Washington who, were by the way, very bit proponents of the anti-regulatory push … who are still … who are in positions of power and you have to wonder if they have actually come around to the view that regulation is, in fact, needed, necessary, required to insure that capitalism doesn’t go off the rails, like it did this time.

HEFFNER: That’s a very scary observation.

MORGENSON: I would like to see more in the way of intelligent regulatory framework for Wall Street, in the financial industry as a whole.

We really haven’t seen any kind of a push that is going to change, for instance, the regulation of derivatives, which are these extremely complex contracts that, you know, trade in the trillions of dollars. And that were central to the failure at AIG, which has cost $173 billion in taxpayer commitments.

HEFFNER: Well, we’ve reached the end of the program and you’re … you’ve scared me more than I thought I would be … scared … by this. But that means that you’ve going to have to come back in the future and say that “now things are rosy”. Thank you so much for joining me again.

MORGENSON: I hope to, thanks.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time.
Meanwhile, as another old friend used to say, “Good night and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.