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2008-07-17

Bailout for Mortgage Giants, IndyMac Bank Collapse, Dollar Hits New Low, Inflation at 26-Year High, Dow Falls Below 11K...A Look at the Financial Crisis

Guests

Danny Schechter, executive editor of MediaChannel.org. He is a documentary filmmaker and author. His latest film is titled In Debt We Trust. He is author of the forthcoming book Plunder: Investigating Our Economic Calamity and the Sub Crime Scandal.

Max Fraad Wolff, economist and writer. He is an instructor at the Graduate Program in International Affairs, New School University. He is a frequent contributor to Huffington Post, Asia Times and The Indypendent.

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It has been a tough seven days for the US economy. On Friday, the FDIC seized control of the failed California-based IndyMac Bank. It was second largest bank failure in US history. Analysts project another 150 banks could collapse. On Sunday, Treasury Secretary Henry Paulson announced extraordinary moves to bail out the mortgage giants Freddie Mac and Fannie Mae. On Tuesday, the Dow Jones Industrial Average dipped below 11,000 for the first time since 2006 and the dollar hit a record low against the euro. And Wednesday, it was announced that inflation is now rising at its fastest pace in twenty-six years. We take an in-depth look an the economic crisis. [includes rush transcript]

Transcript

This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: It has been a tough seven days for the US economy. On Friday, the FDIC seized control of the failed California-based IndyMac Bank. It was second largest bank failure in US history. Analysts project another 150 banks could collapse. On Sunday, Treasury Secretary Henry Paulson announced extraordinary moves to bail out the mortgage giants Freddie Mac and Fannie Mae, which hold nearly half of the nation’s mortgages. On Monday, stock in General Motors fell to a fifty-four-year low. And on Tuesday, the Dow Jones Industrial Average dipped below 11,000 for the first time since 2006, and the dollar hit a record low against the euro. And yesterday, it was announced that inflation is now rising at its fastest pace in twenty-six years. It was also revealed the FBI is investigating nearly two dozen banks, including IndyMac, for mortgage fraud.

AMY GOODMAN: Economist and investor George Soros warned Monday the current financial market turmoil represents the most serious financial crisis of our lifetime. Meanwhile, President Bush has attempted to put a positive spin on the state of the economy.

    PRESIDENT GEORGE W. BUSH: I think the system basically is sound. I truly do. And I understand there’s a lot of nervousness, and — but the economy is growing. Productivity is high. Trade’s up. People are working. It’s not as good as we’d like, but — and to the extent that we find weakness, we’ll move. It’s one thing about this administration: we’re not afraid of making tough decisions.

AMY GOODMAN: To talk more about the economy, we’re joined by two guests. Danny Schechter is executive editor of MediaChannel.org. He’s a documentary filmmaker and author. His latest film is called In Debt We Trust. He’s author of the forthcoming book Plunder: Investigating Our Economic Calamity and the Sub Crime Scandal. Max Fraad Wolff is economist and writer. He’s an instructor at the Graduate Program in International Affairs, New School University. He’s a frequent contributor to The Huffington Post, to the Asia Times and The Indypendent.

And we welcome you both to Democracy Now!

MAX FRAAD WOLFF: Thank you very much.

AMY GOODMAN: What’s happening in the economy? Danny Schechter, let’s begin with you.

DANNY SCHECHTER: Well, when I came on your show when the first subprime crisis manifested itself in August 2007, you know, I said I think we’re going to be in for much worse. I was right on that, unfortunately. I said that this is not just a market correction, but a criminal matter, and I called subprime “subcrime.” The FBI seems to agree with me now, and they have 1,200 investigations underway, including an investigation into Bear Stearns and to what happened there, IndyMac, and other banks. So, I think when the dust shifts, you know, finally, we’re going to find out that this is a criminal action — cabal, really —- by people in the market who were out, driven by greed, to make as much money as they can. The victims of all this can be seen in the mounting foreclosures that are sweeping the nation.

Yesterday, the Associated Press reported a fear of Nile fever in California, West Nile, coming back because of all the swimming pools that have been abandoned, have become infested with mosquitoes. And this has already caused cases of West Nile fever in California and in Florida. There’s fear even of malaria. So, the consequences of this crisis are just being felt by many, many people, and it’s not pretty.

JUAN GONZALEZ: But, Danny, in terms of what the role of the regulating agencies were in this whole situation, because, obviously, whether it’s the SEC or whether it’s the Federal Deposit Insurance Corporation or the Federal Reserve, they all had a role, in terms of what they were doing to prevent this kind of collapse.

DANNY SCHECHTER: I think the more operative phrase, Juan, is “what they were not doing,” OK, because the regulators were asleep at the switch, for the most part. They were not doing their job, even with the regulations that existed. These were, in many cases, so-called exotic new instruments, derivative products and the like, which maybe they weren’t set up to monitor, but they didn’t make the effort.

Also at fault here is our great media system which failed to investigate this when it was happening and something might have been done. And that’s what I talk about in Plunder, this relationship between this credit and debt complex that really dominates our economy, regulating body and bodies that are not regulating, and a media that’s looking the other way.

AMY GOODMAN: Max Fraad Wolff, explain what Freddie Mac and Fannie Mae are and what this bailout means for them?

MAX FRAAD WOLFF: OK. What they are are historically an American dream machine set up in the ’30s and then later to help low— and middle-income people get housing. How do they do that? They buy the loans that banks have already made to relieve banks from the risk of owning those loans and to allow banks to loan more money to buy more houses to loan middle-income people. They really are kind of the American dream machine.

And looking at them in the situation that they’re in right now — and they kind of became the American nightmare machine in the boom of the ’90s and later —- looking at them now is a real sort of metric, it’s a near terminal fever in the American dream machine. Their sickness is a sickness of opportunity for low— and middle-income people to move into houses. So they’re an elaborate federally subsidized system that allows low- and moderate-income people to get home mortgages to get houses in order for us to build more houses and have more people become homeowners, particularly lower down the income ladder.

Until very recently, they were not allowed to be involved in mortgages worth more than $430,000. So, you know, it’s not the most fancy houses. It’s not Palm Beach mansions and such. And even now, with their new increased ability to loan higher sums, it’s still only about $730,000, so it excludes the very wealthy, who presumably don’t need help.

They grew too big. They were privatized in the ’70s and ’80s, and they’re victims of a crisis in this country, where people borrowed much more than they can pay back, and then there’s a small number of cases that they’re willing to pay back. And they now have somewhere on the order of $5.078 trillion worth of mortgage risk exposure, and they have $80 billion worth of capital. And basically, more than their immediate sicknesses, which are real, and their losses, which are real, there’s been a loss of confidence in them and in the system and in the mortgages that they’ve written and that they’ve backed.

And the reason this matters, writ large, is because our housing markets are already sliding, and if anything happens to make them less robust, less able to buy and back mortgages, you can go ahead and expect maybe another five to 15 percent decline in the average house price. And there again, it’s the death of the middle class and the death of the American dream, because if your house is your major asset, it’s already slid 15, 20 percent, and the structures that help support it, particularly low- and moderate-income homes, are weakened, you can expect further pain, further damage and further trouble. So, I mean —-

JUAN GONZALEZ: But let me -— I just want to ask Max about Fannie Mae and Freddie Mac. Weren’t they presumably — they were, to some degree, immune from the subprime crisis, because they were not —- the kinds of loans that they bought usually required at least a minimal down payment and good credit, so that supposedly they were not supposed to get caught up in the subprime crisis.

MAX FRAAD WOLFF: Absolutely correct. I mean, in fact, it is subprime, because it’s nonconforming. That’s what the industry calls it. And by “nonconforming” it means it doesn’t conform to the standards for Freddie and Fannie. So, yeah, they didn’t directly intervene, but a funny thing happened. They weren’t directly making subprime loans; private firms were. But because their mandate is to assist homeownership in low— and moderate-income communities and Americans, they actually ended up buying bundles of subprime loans. They were rated AAA by the S&P, Fitch and Moody’s, but they ended up buying some of those loan bundles, and that’s where they took their initial losses and some of their big losses.

DANNY SCHECHTER: But they were propping up this whole subcrime-subprime system, let’s face it. And now the government wants to bail them out. The Bush administration, big free marketeers, want to now nationalize, in essence, even further, you know, Fannie Mae and Freddie Mac, if they are in danger. And this means potentially billions of dollars in taxpayer money and also increasing potentially the national debt by $5 trillion, if everything collapses.

That’s why homeowners, organizations like NACA, are taking a different position. They’re saying we need to restructure current loans. We need to get bankers to recognize that unless they make loans affordable to low- and middle-income people, these people are going to be facing foreclosure with the ripple effects that foreclosures cause. And this weekend in Washington, NACA is bringing thousands of homeowners to try to restructure their loans and negotiate on it, and if the banks don’t go along, they’re going to Congress to demand congressmen call the bankers to try to negotiate fair settlements for people at risk. And this is a different kind of intervention. It’s not just protest that’s serving this constituency of people who’ve been victimized by the crisis, and also confronting Congress, not for a bailout, but for action.

AMY GOODMAN: We’re going to go to break. When we come back, we’re also going to talk about IndyMac, what does it mean, the lines outside the bank for people to get their money reminding us of 1929 Wall Street. We’re talking with Danny Schechter, executive editor of mediachannel.org. His new book that is just coming out is called Plunder. We’re also joined by Max Fraad Wolff, economist and writer and instructor at New School University. Stay with us.

[break]

AMY GOODMAN: Our guests, Danny Schechter, the News Dissector, executive editor of Media Channel, author of the new book Plunder; Max Fraad Wolff, also with us, economist and writer, a lecturer at the Graduate Program of International Affairs at the New School.

Max Fraad, please talk about IndyMac and what happened with it.

MAX FRAAD WOLFF: Alright. So it’s the largest bank failure since 1984, which was some time ago, so it has drama. I think, sadly, it’s going to lose that record probably within six months or less. But for now it’s —-

AMY GOODMAN: To who?

MAX FRAAD WOLFF: Probably to a couple others. I mean, I wouldn’t want to rank who’s coming first, but it’s not the last. I think there’s pretty much universal agreement on that. Royal Bank of Scotland, which is not, you know, poo-pooing banking, for many obvious reasons, is estimating 150 to 300 small to midsize failures in the next eighteen months, and that’s not considered sort of off the charts.

IndyMac is sort of an interesting story, because it was partially seated by two fellows from Countrywide, which much of your audience is probably familiar with -— didn’t have the best track record in the mortgage business — and they really specialized in a sort of small slice of the business called Alt-A. In the industry, when I was doing research, when we worked on this, we called these “liar loans” — probably wasn’t a bad name. Formally, they’re called no-doc, lo-doc, or Alternative A loans, which means you don’t have to provide a lot of credit history or income verification. And so, they did a lot of lending to people who were unwilling or unable to provide basic background information to their creditors. And it was concentrated in California and the Southwest.

Roughly, looking back from this particular vantage point, this is about the worst business to possibly be in on earth, so when Mr. Schumer wrote the letter that got all the attention, he was kind of stating something that everyone who’s been following it knew, if in a little bit more obvious form. And basically, the relationship between the amount of money they had lent and the amount of money they have and the amount of money they had lost moved into a situation where it was just a question of time until the federal government came in and exercised what it has to do, ideally, to keep people’s faith in the banking system and shut it down, take it over and employ FDIC or federal deposit insurance, so that people don’t lose on their accounts. I would also mention that the FDIC cost of insuring all those accounts is probably equal to about ten percent of the total money in FDIC, which means they’re going to have to charge a much higher premium, or they, themselves, will have to be bailed out by another part of the federal government.

DANNY SCHECHTER: Let me just add to this, because I spoke with Sheila Bair, who’s the head of the FDIC, last December. I asked her, “How many banks are going to fail?” She phumphered around and came up with the number seventy-six. Now we’re talking over 300 potentially. So this crisis is just beginning, and this is one of the problems here. We read the headlines as if everything has already happened, the worst has happened. It hasn’t yet. And that’s what we have to brace ourselves for.

JUAN GONZALEZ: Well, Danny, I want to ask about that, because yesterday’s Wall Street Journal had a big front-page story about how the Securities and Exchange Commission is trying to stop private investment companies that are shorting banks, that are investing in the — on the belief that these banks’ stocks are going to go down. And they’re claiming this is having an even more negative effect on banks, in essence, that there’s speculation going on in the collapse of banks. Your response to this whole issue of shorting? And even —- and a lot of these banks, weren’t they involved in helping to finance these kinds of short investments?

DANNY SCHECHTER: Absolutely. In fact, the New York Sun today, you know, says that one of the problems here was that the regulators weren’t paying attention to all these rumors and all these shorting processes. And this is what the FBI is looking into. My favorite headline is this one in The Onion: “Recession-Plagued Nation Demands New Bubble to Invest In.” I think they’re closest to the mark once again.

MAX FRAAD WOLFF: I do think there’s something important in yesterday’s SEC decision. Christopher Cox, SEC chairman under President Bush, is the Michael Brown of this, and he’s actually underperformed Michael Brown, and he’s going to be remembered as the Michael Brown of the debt tsunami here or the debt flood, pretty easily, in addition to which, there’s a big debate -—

JUAN GONZALEZ: Michael Brown, the former FEMA director.

MAX FRAAD WOLFF: The former FEMA director.

DANNY SCHECHTER: Brownie. Brownie.

MAX FRAAD WOLFF: Yeah, Brownie and the Arabian horse-racing specialist who ended up in a job perhaps he was ill-suited for. But there’s also another thing. On Wall Street, there was a lot of derision for Mr. Cox. And it’s not exactly clear if the law he announced is in fact not a law that was passed in 1998 and which he was unaware of and which he moderately embarrassed himself with one of his first major pronouncements, being in fact a nine-and-a-half-year-old piece of legislation, which wouldn’t, of course, not be a great sign if you’ve taken so long to interact in the markets and you’re now doing something that’s, in fact, already been done.

AMY GOODMAN: What about the comments of former senator Phil Gramm, top economic adviser to Republican presidential candidate John McCain, Gramm recently claiming the country is merely in a mental recession.

    PHIL GRAMM: No politician can talk about, well, things are not as bad as you think, because that sounds like they don’t care. And yet, you just hear this constant whining, complaining about our loss of our competitiveness, America in decline. We’ve never been more dominant. We’ve never had more natural advantages than we have today. We’ve sort of become a nation of whiners.

AMY GOODMAN: That was Phil Gramm. Senator McCain says he’s no longer speaking for him.

DANNY SCHECHTER: The interesting thing about Gramm also is he was directly personally involved as a lobbyist for subprime lenders. He was involved, as, you know, your show reported, in actually creating a provision in the law that allowed the whole subprime-subcrime boom to happen. In fact, when Bruce Marks was fighting the banks up in Boston, he went on the floor of the Senate and called him a terrorist — a terrorist — for challenging predatory lending practices. So, Fred Gramm — I mean, Dr. Phil II here has been, you know, involved on the wrong side of this issue for many, many years.

JUAN GONZALEZ: And what about the Democratic — presumptive Democratic nominee, Senator Obama? What’s been his position in terms of the crisis, the continuing and developing crisis?

DANNY SCHECHTER: Well, you know, to my chagrin, the Obama campaign has not fully confronted this financial crisis. On Saturday last, Obama said he expects the government to do the right thing in terms of Fannie Mae and Freddie Mac, without really spelling it out.

Neither of the candidates have really spoken to this crisis, and neither has the progressive movement. We’re much more interested in what’s on the cover of The New Yorker than what’s happening to millions of families in America. And I think that this is something that has to change, that we have to become much more aware of, informed about these economic issues and engaged in trying to fight back against what’s happening to the middle class, to the working class now, ordinary Americans. Wealthy Americans are also being affected by this. We all are. Inflation goes up, our money loses value.

MAX FRAAD WOLFF: But all these things are really dangerous, because you’ve entered a space that’s both too big to fail and too big to bail. These are too large to bail out and too large and too important to let fail. And so, everybody’s kind of caught a little bit deer in the headlights, from the regulators and others, trying to figure out what to do. They want to partially bail it, but it’s so much money, and it’s ideologically difficult after twenty years of free market rhetoric, and so they kind of hope they can jawbone it and patch it and things will work themselves out. And that really hasn’t proved to be a strategy that yields a lot of fruit. But people are kind of stuck in the shock mode and in the too big to bail and too big to fail.

JUAN GONZALEZ: And, Max, I’d like to ask you, in terms of internationally, because many of these securitized loans were being bought by institutions and pension funds all over the world. What’s the impact worldwide on this?

MAX FRAAD WOLFF: A lot of losses, possibly more losses to come, and maybe most importantly, a slowing of the amount of money being lent into the United States, which in a credit-addicted society is potentially fatal for segments of the American middle class — and for American business, it’s terrible — and a general loss in faith in the quality of American assets. And that already has an expression in what you started your show with, which is an all-time new low for the dollar, because if you’re not loaning money to the United States and you’re not really interested in investing here or you’re a little nervous about it, then you do less of it, and the value of our currency, as well as our prestige, decline in combo. And by the way, that then triggers rising oil and food prices, which are smashing into the same people hit by the foreclosures and making them poorer as they face more expensive basic life costs. And that’s a bit of a perfect storm.

AMY GOODMAN: And inflation rising at its fastest rate in twenty-six years?

MAX FRAAD WOLFF: Yeah.

AMY GOODMAN: The significance of this?

MAX FRAAD WOLFF: And that’s inflation numbers that the federal government does everything short of illicit to keep down. So actual numbers would be higher. If you didn’t manipulate with seasonal adjustments and these other weird hedonic adjustments and manipulations in the statistics, the number would be even higher. And it’s high enough to say that American families and people are in a scissors crisis, hit from above by loss of wealth and a softening job market and hit from below by rising basic costs for food, fuel, etc.

DANNY SCHECHTER: That’s a new word for me: “hedonic.” I like that one. You know, but this is happening. I was in South Africa recently; inflation is beginning to climb there. England is being buffeted. There’s a bank failure in Denmark. I mean, this is spreading.

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