Five
years ago -- on Sept. 15, 2008 -- Lehman Brothers collapsed, bringing
the housing crisis to a head, forcing the bank bailouts and escalating
an economic crunch we still feel today. Here are the key players.
From Wall Street to Washington
It was the moment the housing crisis came to a head. On Sept. 15, 2008,
Lehman Brothers
-- a Wall Street fixture founded in 1850 and the fourth-largest
investment bank in the United States -- filed for bankruptcy, crippled
by the crash of a U.S. real estate market that once seemed bulletproof.
Almost simultaneously,
Merrill Lynch was rescued by a takeover by
Bank of America (
BAC), and the stock market plunged.
The
Great Collapse of 2008 -- and the intense period running from the
disintegration of Lehman to the bank bailouts just two weeks later --
was precipitated by the near-death of the global financial system, which
had funneled trillions of dollars into our ridiculously overvalued and
vulnerable real estate market.
Oil prices had been rising, and
consumers had stopped buying cars, traveling and shopping. The economy
was being dragged down by ongoing conflicts in Iraq and Afghanistan.
Efforts by the Federal Reserve, other central banks and the government
to head off the meltdown fell short.
To this day, exactly what
went wrong -- and whether Wall Street, Washington or the Fed was at
fault -- remains a point of contention. In fact, all deserve a share of
the blame.
Underneath all those forces were people. People who
made bad, stupid, negligent, incompetent -- and, occasionally good --
decisions that affected millions, with ramifications that stretched
through the Great Recession and continue today.
Richard Fuld, former CEO of Lehman Brothers
Best known for: He
was among the 25 highest-paid CEOs for eight straight years, but his
legacy is betting his investment bank's future on real estate. Lehman
Brothers was successful in developing and selling mortgage-backed
securities around the world, but it also held on to many of those
securities when their value collapsed with the housing market in
2007-08.
Worst decision: Letting the bank's
leverage ratio -- the ratio of borrowings to capital -- rise to more
than 31. While the stock jumped 193% from the end of 2002 to the end of
2006, it was apparent by early 2007 that Lehman's exposure to real
estate made it vulnerable. A housing downturn could sink the company.
Fuld ignored warnings from inside his company and resisted advice to
find a merger partner who could invest billions to shore up Lehman’s
balance sheet.
Where is he now? Fuld tried to get
back into the securities industry, but he seems to have given up. He
has sold his 6,000-square-foot New York City apartment and millions of
dollars in art work. He’s far from broke, though. He still has homes in
Connecticut, Florida and Sun Valley, Idaho. He was paid $310 million in
cash and stock from 2000 to 2007. He sold more than $400 million worth
of shares during that time. Fuld is no doubt worth a lot less now than
he was before the crash. And he is routinely cited as one of the worst
chief executive officers of a public company.
Kerry Killinger, former CEO of Washington Mutual
What he's known for:
Killinger was the CEO of Washington Mutual in Seattle, the nation's
largest savings and loan from 1990 until the fall of 2008. Killinger
wanted to turn the bank into the
Wal-Mart Stores (
WMT) of banking, catering to lower- and middle-class consumers that other banks deemed too risky.
Why the strategy didn't work:
WaMu, as the company was known, offered complex mortgages and credit
cards with terms that made it easy for the least-creditworthy borrowers
to get financing, a strategy the bank extended in big cities, including
Chicago, New York and Los Angeles. WaMu pressed sales agents to approve
loans while placing less emphasis on borrowers’ incomes and assets. WaMu
set up a system in which real estate agents could collect fees of more
than $10,000 for bringing in borrowers.
The problem was that many of the loans that WaMu extended went bad quickly; problems began to appear as early as 2004.
What was the result?
In April 2008, Killinger stepped aside as chairman after a raucous
annual meeting in which he was repeatedly booed. On Sept. 8, 2008, he
was fired as CEO. Seventeen days later, the Federal Deposit Insurance
Corp. seized WaMu after depositors withdrew $16.7 billion in deposits in
a nine-day period. Before the seizure, Washington Mutual was the
nation's sixth-largest bank by assets. The failure was the largest by a
U.S. bank.
Where is he now? Killinger lives with
his second wife, Linda, in one of Seattle's toniest communities. He sued
the government, which countersued. Killinger and two other executives
agreed to pay $64 million to settle an FDIC suit against them. Critics
say the settlement was too small.
Angelo Mozilo, former CEO of Countrywide Financial
Best known for: His
near-permanent tan and massive marketing of subprime mortgages to
homebuyers, including prominent politicians and others, generally known
as "Friends of Angelo." The mortgages were then sold to an investment
bank or
Fannie Mae (
FNMA),
where they were repackaged into mortgage securities and sold around the
world. The problem was that a large portion of those loans went bad,
often within weeks of being closed.
Worst decision: Making
a huge bet on subprime mortgages -- loans made to buyers with little or
no credit history and often no way to make regular payments. He gained
infamy when he cashed in $129 million in gains by exercising stock
options in the year before the housing market’s weaknesses appeared.
Bank of America (
BAC)
bought Countrywide in 2008 for about $4.1 billion and has spent more
than $40 billion settling Countrywide's problems. The purchase is touted
as perhaps the worst business deal ever.
Where is he now?
Mozila is keeping a low profile. He paid a $22.5 million fine and
disgorged $45 million to settle charges of insider trading and
misleading investors. He also accepted a lifetime ban from serving as an
officer or director of any public company. He is still called on to
testify in various lawsuits. In one deposition, he said Countrywide was
"a world-class company in every respect."
Stanley O'Neal, former CEO of Merrill Lynch
Best known for: O'Neal was born in a small Alabama town, but his father moved to Atlanta to work for
General Motors (
GM).
Stan O'Neal also worked at General Motors, which financed his Harvard
MBA. O'Neal took over Merrill Lynch in 2003. He insisted that Merrill
grow while cutting costs sharply and decided to follow Lehman Brothers’
push into the mortgage business.
Soon, Merrill Lynch was making
huge investments in subprime mortgages and various mortgage securities,
including collateralized debt obligations.
Worst decisions: The first was buying
First Franklin,
a mortgage broker that specialized in making subprime loans. Merrill
also underwrote $54 billion in mortgages in 2006, triple what it
underwrote in 2005. About $44 billion of the loans were subprime. In the
spring and summer of 2007, the market for mortgages seized up, and
Merrill found itself holding $48 billion in loans it couldn't sell. In
the third quarter of 2007, Merrill wrote off $8.4 billion in assets, 22%
of its net worth.
O’Neal’s worst decision was making a merger overture to
Wachovia in late 2007 without first telling his board. Their response was to fire him.
What he's doing now: O'Neal left Merrill Lynch in September 2007 with $161.5 million in securities and retirement benefits. He is now a director of
Alcoa (
AA)
and serves on the board of Memorial Sloan-Kettering Cancer Center in
New York City. He is also a member of the Council on Foreign Relations,
the Center for Strategic and International Studies and the Economic Club
of New York. A year after O'Neal left, Merrill Lynch was sold to
Bank of America (
BAC). Ironically, O'Neal had made overtures to Bank of America before contacting Wachovia.
John Thain, the last CEO of Merrill Lynch
What he's known for: Before joining
Merrill Lynch in January 2008, Thain, a graduate of MIT and the Harvard Business School, was a wunderkind who had been a top executive at
Goldman Sachs Group (
GS) and CEO of the New York Stock Exchange.
Bad decision: He
gained notoriety for remodeling his office at Merrill Lynch for a
reported $1.22 million. The costs included $131,000 for area rugs and
$68,000 for an antique credenza. He reimbursed Merrill for the costs.
Biggest problem: Thain
was unable to turn around Merrill Lynch's fortunes as financial markets
fell back and economies around the world fell into recession.
Best decision:
As financial markets collapsed in the summer and early fall of 2008,
Thain realized that Merrill Lynch couldn't survive. So he arranged to
sell the company to
Bank of America (
BAC) for $50 billion.
Worst decision:
Merrill reported an unexpectedly huge loss of $15 billion for the 2008
fourth quarter. It came after Thain asked that $4 billion in bonuses to
Merrill executives be accelerated. After a meeting with Bank of America
CEO Ken Lewis, Thain resigned.
What is he doing now? Since February 2010, Thain has been chairman and CEO of
CIT Group (
CIT),
with a $6 million annual salary. The company was in Chapter 11
bankruptcy when he joined, but debt and costs have been cut or
restructured. The company is profitable again, and shares are up about
60%.
He is a trustee of Howard University and the National Urban
League, and he is also a member of the Trilateral Commission. He is an
active Republican and is close to Sen. John McCain, R-Ariz.
Joseph Cassano, former head of AIG Financial Products
What he's known for:
Before retiring in early 2008, Cassano, the Brooklyn-born son of a New
York City policeman, built up AIG Financial Products, a then-wildly
lucrative business in credit default swaps, out of a small office in
London. These were essentially insurance policies in which Company A
paid
American International Group (
AIG) a premium against a possible corporate default by Company B. If Company B defaulted, AIG would have to pay Company A.
The
Financial Products group generated $300 million a year in profit for
AIG before the crash. It was so dependably profitable that AIG's top
management mostly left it alone.
That Achilles heel set off AIG’s
2008 plunge. Most of the swaps involved companies seeking to hedge their
exposure to subprime mortgages, and AIG and Cassano didn't foresee what
a mortgage crash might do to its business.
The 2008 crash made
defaults probable, and AIG didn't have the resources to pay up. So the
insurance giant sought and received about $180 billion in taxpayer
assistance to pay off its obligations to companies that included
Goldman Sachs Group (
GS) and
Morgan Stanley (
MS).
Worst decision:
Failure to run worst-case scenarios to see if AIG could survive massive
demands for payoffs on the swaps. Instead, Cassano famously said in
2007, "It is hard for us, and without being flippant, to even see a
scenario within any realm of reason that would see us losing $1 in any
of those transactions."
Where he is now? It appears that Cassano is laying low in London, fending off lawsuits and trying to get on with his life.
Herbert and Marion Sandler, former co-CEOs of Golden West Financial
Why they matter: The Sandlers’
Golden West Financial owned the savings and loan
World Savings,
based in Oakland, Calif. Through it, they promoted what's known as the
"option ARM." This is an adjustable-rate mortgage that gives a borrower
the option of choosing how to make payments: principal only, interest
only or paying on both.
But while World Savings underwrote all its
own loans and insisted on sizable down payments, competitors didn’t
necessarily make the same effort to minimize the risks of similar loans.
These loans offer buyers flexibility, but they pose a big risk if the
housing market falls apart.
What happened: The Sandlers sold Golden West Financial to
Wachovia
for $24 billion at the top of the market. Wachovia expanded the
marketing of option ARMS and softened lending standards, and was later
done in by the collapse of home values. It's now part of
Wells Fargo (
WFC).
Where are the Sandlers now?
With half their $2.4 billion gain from the sale, the couple started a
foundation that helps fund the Center for Responsible Lending, a
nonprofit, nonpartisan organization fighting predatory mortgage lending,
payday loans and other products that prey on consumers. It is a large
donor to the Center for American Progress, a progressive think tank, as
well as a backer of ProPublica, the investigative reporting news
organization. Marion Sandler, who often knitted during company board
meetings, passed away in 2012.
Lloyd Blankfein, CEO of Goldman Sachs Group
What he's known for: The
crash was above all else a financial implosion, and as Wall Street
reeled, the chiefs of the big banks were questioned much more closely
and sharply than ever before. Blankfein took perhaps the most public
beating.
Goldman Sachs Group (
GS),
with Blankfein as CEO, managed its way through the 2008 crash
financially intact, but with its reputation bruised. Rolling Stone's
Matt Taibbi memorably named Goldman "the vampire squid."
Its
trading operations were terrifically profitable. And it was often ahead
of its competitors in seeing the imbalances building up in the economy
-- imbalances that, for Goldman, created opportunities. It reportedly
shorted (bet against) some of the mortgage-backed investments it
underwrote. It created ways for some clients to speculate against
others, bullied others and had 100% of its positions made whole in the
American International Group (
AIG) collapse.
Jamie Dimon, Chairman and CEO of JPMorgan Chase
What he's known for: Dimon pointedly worried about worsening subprime mortgage problems in a 2007 letter to shareholders, and
JPMorgan Chase(JPM) carefully trimmed its exposure to the bursting housing bubble. From the crisis, JPMorgan acquired the assets of
Bear Stearns, which imploded in March 2008, and it bought the banking operations of
Washington Mutual.
While problems at
Citigroup (
C) and
Bank of America (
BAC)
led to critics arguing that big banks can be too large to manage
effectively, Dimon has nurtured the belief that he and JPMorgan were
above the crisis.
But mistakes have been made: A
giant, complex trade made from its chief investment office's team in
London blew up in the spring of 2012 and shattered JPMorgan's image of
invincibility. The trade was originally designed to protect JPMorgan
from another crash-like event. Instead, it cost the company $6 billion.
Several executives lost jobs; two are facing criminal charges. Dimon had
earlier derided concerns about the trade as a tempest in a teapot.
What has happened to JPMorgan:
Lots of hearings and articles in financial publications trying to get
at the important question of whether a giant international bank is
simply too complex to run. After Dimon disclosed the problem in May
2012, the stock fell nearly 24% in the ensuing three and a half weeks.
It is up 67% since.
What has happened to Dimon: An attempt to split up his CEO and chairman jobs failed at the company's annual meeting in May.
A
federal jury recently found Goldman trader Fabrice Tourre liable for
defrauding investors in a deal that fell apart during the financial
crisis. Less seriously but still offensive, one Goldman trader described
publicly how some clients were viewed as “muppets” to be victimized.
What has happened to Goldman shares? They fell 80% from their 2007 peak of $250.70 to $49 in November 2008. They've risen 219% since.
Where's Blankfein now? He's still running Goldman. He's also in demand for TV appearances, where he displays a beard and a puckish wit.
Ken Lewis, former CEO of Bank of America
What he is best known for: Lewis bought
Countrywide Financial and
Merrill Lynch for
Bank of America (
BAC).
The $4 billion Countrywide deal has been a disaster, with losses
topping $40 billion. Merrill Lynch also proved costly, at least at
first. Further, the recession damaged Bank of America's core operations.
In 2008, Bank of America required $45 billion of direct assistance from
the government and $118 billion in asset guarantees to keep from
collapsing.
Merrill has returned to profitability and is now one of Bank of America's most important assets.
Worst decision: Countrywide,
by far. Not only were the loans bad, but the paperwork on the mortgages
was in such awful shape that Bank of America often foreclosed on
properties whose owners had been making payments faithfully.
What has happened to Bank of America's stock? It peaked at about $55 in October 2006 and collapsed to $3 in March 2009. It's now at about $14, and up about 20% this year.
What is Lewis doing now? Thanks
to an $83 million package when he resigned in 2009, Lewis doesn't have
to do much. He wanted to become a really big banker. Instead, his
reputation suffered with the enormous costs Bank of America incurred in
the Countrywide fiasco and Merrill Lynch takeover. Early this year, he
sold his home in Charlotte, N.C., for $3.15 million. Originally listed
at $4.5 million, the house had been on the market for three years; the
price was cut four times. Lewis and his wife have bought a townhouse
elsewhere in Charlotte.
Chuck Prince, former CEO of Citigroup
What he's known for: Prince followed the legendary Sandy Weill as
Citigroup (
C) CEO and seemed to struggle to understand its chaotic structure.
Moreover,
Citigroup was a leader in packaging mortgages and selling them to
investors as mortgage-backed securities and collateralized-debt
obligations. The bank was also an active player in lending for leveraged
buyouts. The company tried to hide many of its activities by packaging
the securities into off-balance-sheet investment partnerships. Prince
completely missed the threat that subprime mortgages posed to the global
banking giant. Even as subprime loans were eating at Citigroup, it
continued to lend heavily to fund big leveraged buyouts. Why? "As long
as the music is playing, you've got to get up and dance," Prince told
The Financial Times at the time. "We're still dancing."
In 2007,
two months after saying Citigroup was immune to subprime worries, the
company was forced to take a $6 billion writedown on its assets for the
third quarter and admit it would write down an additional $8 billion to
$11 billion in the fourth quarter.
Analyst Meredith Whitney of
Oppenheimer became a Wall Street star when she estimated Citigroup would
have to raise $30 billion in new capital. Investors dumped the stock.
Price
resigned on Nov. 4, 2007, with an $80 million package. He was replaced
by Vikram Pandit. Problems got much much worse. Preventing a Citigroup
collapse required $45 billion of direct taxpayer aid and, ultimately,
$476.2 billion in cash and loan guarantees, a watchdog group reported in
2011.
Prince’s biggest mistake: Failure to analyze and understand the risks from growing amounts of subprime mortgages on the books.
What is Prince doing now? He offers advice to corporations and spends most of his time in Palm Beach, Fla.
Next, we’ll look at the Fed chiefs who have overseen the crisis.
Alan Greenspan, Federal Reserve chairman 1987-2006
Best known for: A disciple of libertarian writer Ayn Rand, Greenspan is a strong supporter of laissez-faire economics and minimal regulation.
Best decisions:
Prompt assistance to the banking system after the 1987 stock market
crash, the 1998 Russian currency crisis and the September 2001 terror
attacks.
Worst decisions: In the aftermath of the
9/11 attacks, Greenspan's Fed cut its key rate to 1%. The low rates
unleashed the housing bubble that started popping in 2006. He also
refused to support moves to regulate financial derivatives (such as
mortgage-backed securities) and curb their risks to markets. The result:
Congress specifically exempted derivatives from regulation.
What's he doing now: Greenspan
was once considered the greatest of Fed chairmen, but his reputation
was severely damaged by the financial crash. He has acknowledged that he
had too much faith in the self-correcting power of free markets and
failed to anticipate the self-destructive power of wanton mortgage
lending. "Those of us who have looked to the self-interest of lending
institutions to protect shareholders’ equity, myself included, are in a
state of shocked disbelief," he told a congressional hearing in October
2008.
Today, he makes speeches and writes books.
Ben Bernanke: Federal Reserve chairman, 2006 to present
Best known for:
Extreme, if controversial, creativity in adding financial reserves to
the banking system to prevent the credit system from seizing up
entirely. He also has promoted several rounds of purchases of government
bonds and mortgage bonds in an effort to keep long-term rates low and
get the economy and job market moving.
Worst decisions:
Raising short-term interest rates too much too quickly through 2007,
exposing the flaws in the mortgage market. He failed to see the risks to
the economy of subprime mortgages until it was too late. And he agreed
with the decision to let
Lehman Brothers fail on the weekend before Sept. 15, 2008. That event set off the worst of the financial crisis.
What's unknown: Whether tapering the Fed's bond-purchasing program can be done without pain of inflation or recession.
What's he doing now: Bernanke is expected to announce soon that he will resign by January. He expects to return to Princeton University.
Next, we’ll look at three presidents and their roles in the housing bubble and bust.
George W. Bush, president, 2001-2009
Best known for:
Invading Afghanistan and Iraq while cutting taxes substantially. The
costs of those conflicts swelled federal deficits massively, and the
money flowing into consumers’ pockets from tax cuts combined with the
Fed’s low interest rates to inflate housing prices.
Best decision:
Convincing Hank Paulson to become Treasury Secretary and letting
Paulson direct the administration's response to the financial crisis.
While there are detractors and early efforts failed, the outcome could
have been much worse without the bank bailouts.
Worst housing-crisis decisions: His
administration maintained a mostly hands-off approach to financial
regulation, and early efforts to head off the housing crisis didn’t
succeed.
What he's doing now: He lives in Dallas with his wife, Laura, and makes relatively few pronouncements on public policy.
Bill Clinton, president, 1993-2001
How he was involved in the crash: Bush's
predecessor signed two key bills that may have led to the
destabilization of the financial system. The first was the
Graham-Leach-Bliley Act, in which Congress repealed the Glass-Steagall
Act, enacted in the 1930s to separate commercial banking from investment
banking.
The second was the Commodity Futures Modernization Act.
This officially ensured the deregulation of financial products known as
over-the-counter derivatives. The act also meant that there would be no
transparency in financial derivatives, the kind of investment vehicles
used to sell subprime mortgages around the world and to bet on their
failure. Without transparency, the crisis was all but impossible to head
off.
Clinton's reaction today: He does not
apologize for the repeal of Glass-Steagall and says deregulation itself
did not create the crisis. He does concede that the decision to leave
derivatives unregulated was not a good one.
What he's doing now:
Clinton plays the role of a very active former president. He gives
speeches that command huge fees, and he supports Democratic candidates,
including his wife, former Secretary of State Hillary Clinton. He also
works on expanding his Clinton Foundation and the Clinton Global
Initiative.
Barack Obama, president, 2009 to present
How he fits into the financial crisis: Obama
came to the White House with no direct business experience or interest
in markets and economics, unlike George W. Bush or Bill Clinton. And he
inherited the worst recession since the early 1980s, if not since the
Great Depression.
Obama, the markets and the economy: Wall Street was wary of Obama. Between his election on Nov. 4, 2008, and the March 9, 2009, market bottom, the
Dow Jones Industrial Average (
$INDU)
fell 32%. But since bottoming out, the Dow is up 128.1%. The
unemployment rate from the Great Recession has dropped from 10% at its
peak to 7.3%. Nonfarm payrolls have risen by 6.7 million.
His best decisions:
Supporting the efforts of Fed chief Bernanke and Treasury Secretary Tim
Geithner to put the top banks through a stress-testing process that
helped restore some confidence in the banking system. He also expanded
on George W. Bush's decision to extend help to
General Motors (
GM) and
Chrysler. That has helped the economies of Michigan, Ohio, Indiana, Illinois and Wisconsin.
His worst decisions: Conservatives
argue with his heavy stimulus spending and say the post-crash economic
recovery has been too weak. Liberals argue that Obama's stimulus program
was too little and hardly long enough.
Where is he now: Serving his second term.
Lastly, we’ll look at other key players in government who contributed to the meltdown and its aftermath.
Christopher Cox, SEC chairman, 2005-2009
His role: He
was tapped to head the Securities and Exchange Commission in the summer
of 2005. Before that, he had been in Congress for 17 years,
representing Orange County, Calif., south of Los Angeles.
What he's known for: First,
the SEC on Cox's watch never looked into tips that Bernard Madoff was
running an investment scam. The revelation after Madoff's confession was
deeply embarrassing.
Second, the SEC under Cox was a lax
enforcer. Cox said in interviews in 2008 that his agency lacked
authority to limit the massive leveraging that set off the 2008 crash.
The SEC did have the authority to go after big investment banks like
Lehman Brothers and
Merrill Lynch
to demand better disclosure, but chose not to, as Fortune magazine has
argued. Cox oversaw a dwindling SEC staff and a sharp drop in actions
against some traders.
What is he doing now: He works in the Costa Mesa, Calif., office of Bingham McCutcheon, a national law firm based in Boston.
Phil Gramm, senator from Texas, 1985-2002
What he's known for:
Gramm, who served as chairman of the Senate Banking Committee from
1999-2001, was Washington's most prominent champion of financial
deregulation -- and easily its most outspoken one. He was a key player
the writing and passage of the 1999 repeal of the Depression-era
Glass-Steagall Act, which separated commercial banks from Wall Street.
With
the support of former Fed chief Greenspan and then-Treasury Secretary
Larry Summers, Gramm also inserted a key provision into the 2000
Commodity Futures Modernization Act that exempted over-the-counter
derivatives such as credit-default swaps from regulation by the
Commodity Futures Trading Commission. Credit-default swaps took down
American International Group (
AIG), resulting in a $180 billion bailout.
What he's doing now: Gramm
remains active in Republican politics. He was co-chairman of Sen. John
McCain's 2008 GOP presidential campaign and was expected to become
Treasury secretary had McCain won.
In July 2008, he famously put
down talk of a recession. "You've heard of mental depression; this is a
mental recession." Then, he added, "We have sort of become a nation of
whiners, you just hear this constant whining, complaining about a loss
of competitiveness, America in decline."
He was a vice chairman of
UBS (
UBS)
from 2003 to 2012. He now is a consultant and lives outside San
Antonio. His wife, Wendy Lee Gramm, is an equally conservative economist
and headed the Commodity Futures Trading Commission. She was also on
the board of
Enron when it collapsed in late 2001.
Chris Dodd, senator from Connecticut, 1981-2011
What he's known for:
The son of a one-time Connecticut senator, Chris Dodd was the
longest-serving senator in Connecticut history. His legacy will be the
passage of the
Dodd-Frank Act, which is supposed to reform the financial services industry.
But
Dodd has a complicated history. In his last term, he was chairman of
the Senate Banking Committee from January 2007 to January 2011, when the
Democrats controlled the Senate. During his Senate years, he refinanced
two homes through Countrywide Financial and allegedly received
favorable rates on his loans by inclusion in what was known as the
"Friends of Angelo" program. The program, named inside Countrywide for
CEO Angelo Mozilo, included politicians, former CEOs and other
executives
of Fannie Mae (
FNMA).
The Fannie Mae/Freddie Mac connection: Dodd has been criticized for his defense of Fannie Mae and sister company
Freddie Mac (
FMCC).
The so-called government-sponsored enterprises had originally been
organized to buy mortgages from lenders, replacing their cash to make
more loans. Over time, both became so large that critics worried they
could be crippled if interest rates moved up or mortgage markets
collapsed. Which is what happened in 2007 and 2008.
Dodd resisted
plans by then-Treasury Secretary Hank Paulson to put Fannie Mae into
receivership. While the Bush Administration said Fannie and Freddie were
in dire straits, Dodd argued they were "fundamentally sound" and the
like. Dodd's worry was that the move would make affordable financing for
lower-income buyers more difficult to obtain.
Fannie and Freddie were among the biggest donors to Dodd's campaigns.
Why Dodd left office:
Voter anger over the Countrywide allegations and the enormous costs the
government assumed in taking over Fannie Mae and Freddie Mac crippled
his 2010 reelection hopes. So, he bowed out of the 2010 race.
What's he doing now: Dodd
landed on his feet. In March 2011, he was named chairman and CEO of the
Motion Picture Association of America, the industry's trade group, at a
salary of $1.5 million a year.
Barney Frank, Massachusetts congressman, 1981-2013
His role in the financial crisis:
Frank was the ranking Democrat on the House Financial Services
Committee from 2003 until his retirement. From 2007 to 2011, he was the
committee chairman. During the 2008 crash, he steered through the
legislation that established the Troubled Asset Relief Program, which
helped stabilized the nation's banking system. He also was a leader in
the passage of the
Dodd-Frank Act,
a wholesale and complicated overhaul of financial laws. Among its most
important provisions is the authority for the Federal Reserve to take
over and wind down institutions that threaten the stability of the
banking system.
What do critics say? Conservatives
and the banking industry loathe the Dodd-Frank law, saying it imposes
so many conditions and regulations that the law could strangle the
financial system.
They also say Frank was too willing to leave
Fannie Mae and Freddie Mac alone and thus helped create the housing
crisis. The government-sponsored agencies provide cash to the mortgage
lending industry and have been among the largest investors in mortgages
and derivatives built around mortgages. However, many analysts of the
crash believe the housing crisis wasn't caused by Fannie and Freddie;
instead, they were pulled into it by loan brokers who could sell their
toxic loans directly to Wall Street investment houses like Lehman Bros.
and Merrill Lynch instead of going through the government-sponsored
agencies.
Critics largely concede that Frank was one of the
House's smartest and toughest congressmen. But he also could be a bully,
routinely dressing down staffers, reporters and other members of
Congress. During the 2008 crisis, former Treasury Secretary Hank
Paulson, hardly a liberal, told The New York Times that he was surprised
at Frank’s keen understanding of Wall Street, even though Frank had
never worked there.
What he's doing now: He
lives in the Boston area, is writing two books and hopes to do some
teaching. He was the first gay member of Congress to come out
voluntarily and the first to marry his partner.
Robert Rubin, Treasury secretary, 1995-1999
What he is known for:
He was chairman of former President Bill Clinton's Council of Economic
Advisors before becoming Clinton’s Treasury secretary. He had previously
been co-CEO at
Goldman Sachs Group (
GS), where he worked for 26 years. After his time in Washington, he became director and senior counselor for
Citigroup (
C), where he earned some $126 million in salary, bonuses and options.
What he is not known for:
Recognizing the forces that would blow up credit, bond and stock
market, starting with his agreeing to exempt financial derivatives in
2000.
Rubin’s miscues also include mortgages and housing. With his
vast experience, one might have thought he would have strongly advised
Citigroup to get out of buying subprime mortgages, with the hope of
repackaging them as bonds for investors. But the record suggests he did
not until he was too late.
What is Rubin doing now? He
is involved in the Hamilton Project at the Brookings Institution think
tank. Its chief goal is to examine the relationship between government
spending and unemployment. He is also co-chairman of the Council of
Foreign Relations and a member of the board at Harvard. He is a
counselor to Centerview Partners, a boutique investment bank in New
York.
Larry Summers, Treasury secretary, 1999-2001
What he's known for: Summers
has been chief economist at the World Bank and, during the Clinton
years, undersecretary of the Treasury for International Affairs, deputy
Treasury secretary and Treasury secretary. He was the director of the
National Economic Council under Obama in 2009-10.
Summers also has been president of Harvard University.
His role in the crash: As
Treasury secretary, he joined with Greenspan to support the
deregulation of the financial-services industry. Summers’ role in
exempting financial derivatives such as credit default swaps from any
regulation is well known, and he has conceded that the exemption hurt
markets.
His role in Obama’s economic recovery program: Summers
cut the size of Obama's stimulus to $800 billion. Christina Romer, then
chairwoman of the Council of Economic Advisors, had proposed $1.8
trillion. Summers left the administration in 2010.
What is Summers doing now? He has worked for hedge fund
D.E. Shaw,
Citigroup (
C) and
Nasdaq OMX (
NDAQ). He is a director of
Square, the electronic-payments service. He is reportedly hoping to be nominated as Federal Reserve chairman to replace Ben Bernanke.
Hank Paulson, Treasury secretary, 2006-2009
Best known for: He was the strongest proponent for letting
Lehman Brothers fail.
Best decision: Promoting legislation to provide emergency assistance to the nation's banks.
Worst decision:
Letting Lehman fail, because it destabilized global financial markets
in so many unforeseen ways. One of the subtlest problems: The failure
forced money-market funds that owned short-term securities from Lehman
to take losses, setting off a run on money-market funds. As
Allan Sloan noted in the Washington Post, the government had to guarantee all accounts to quell the panic.
Another
problem: Some hedge funds used Lehman's office as their prime broker.
When it failed, funds started to pull out cash from
Morgan Stanley (
MS) and
Goldman Sachs Group (
GS). The Federal Reserve had to make both bank-holding companies whole so they could access Fed assistance.
What is Paulsen doing now? A
former Goldman Sachs co-CEO, Paulson has moved back to Chicago. He is
active in the Nature Conservancy and is setting up the Paulson Institute
at the University of Chicago to promote U.S.-China trade.
Timothy Geithner, Treasury secretary, 2009-2013
Best known for: Hyperactively jawboning banks to merge in the weeks leading up to the
Lehman Brothers
collapse. As Treasury secretary, he played a critical role in directing
spending that came out of the financial crisis, including allocation of
$350 billion of funds from the Troubled Asset Relief Program, enacted
in October 2008. He worked with the Fed to design stress tests of banks
and other giant institutions that helped rebuild confidence in the U.S.
bank and credit systems.
Best decisions: Helping to get the stress tests started; helping the passage of the Dodd-Frank financial reform legislation in 2010.
Worst decision: Resisting efforts to require counterparties in
American International Group's (
AIG)
credit-default swaps to bear some of the losses from the fiasco,
thereby raising the government's exposure to AIG mistakes. Critics also
say he bent too easily to large banks, particularly
Citigroup (
C).
What is he doing now? Geithner,
who also served as president of the Federal Reserve Bank of New York
from 2003 to 2009, is a distinguished fellow at the Council on Foreign
Relations. He also gives speeches, collecting very large fees. Three
speeches early in 2013 netted him $400,000.
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