22 “Not going to be penniless” Munnell, interview, December 8, 2010.
23 Failure to sign up Press release, “54th Annual Survey of Profit Sharing and 401(k) Plans,” Profit Sharing/401(k) Council of America, October 11, 2011, http://www.psca.org.
24 Low contributions Anne Tergesen, “401(k) Law Suppresses Saving for Retirement,” The Wall Street Journal, July 7, 2011.
25 Only 10 percent Ibid.; Eschtruth, email, January 23, 2011; see also Population Reference Bureau, “U.S. Labor Force Trends,” Population Bulletin 63, no. 2 (June 2008); Alicia Munnell, interview, February 6, 2006, transcript, “Can You Afford to Retire?,” PBS Frontline, May 16, 2006, http://www.pbs.org.
26 Many other people Excerpt of interview of Alicia Munnell, interview for the Frontline program “Can You Afford to Retire?,” February 6, 2006, http://www.pbs.org/frontline.
27 “Everything! Everything has gone wrong …” Ibid.
28 Plan holders lost an estimated $2.8 trillion Eschtruth, email, November 7, 2011.
29 Many employers cut back, too “In Need of Cash, More Companies Cut 401(k) Match,” The New York Times, December 21, 2008; David Kansas, “Has the 401(k) Failed?” CNNMoney.com/Fortune, June 16, 2009.
30 Overall, one in five “Good News for 401(k) Plans, Just in Time for the Holidays,” Profit Sharing/401(k) Council of America, December 17, 2010, http://www.psca.org.
31 Corporate America was still pinching “Retirement Plans Make Comeback, with Limits,” The Wall Street Journal, June 14, 2011.
32 People had totally unrealistic expectations John Bogle, interview, December 12, 2010.
33 Cost investors $8 trillion John Bogle, testimony, House Committee on Education and Labor, February 24, 2009, http://johncbogle.com/wordpress/wp-content/uploads/2009/03/statement2009.pdf; Hamilton, interview, December 8, 2010.
34 Don’t reap the full benefit Ibid.
35 That is why Bogle Ibid.
36 Most people are shocked VanDerhei, email, July 20, 2010.
37 Sets slightly lower targets Eschtruth, email, December 15, 2010.
38 “I got hit like everyone else” Rich Kidner, interview, July 12, 2010.
39 “Where am I going to get” Ibid.
40 But the experts at EBRI Dallas Salisbury, interview excerpt from Frontline, “Can You Afford to Retire?,” November 9, 2005.
41 Put the figure higher Brooks Hamilton, interview excerpt from Frontline, “Can You Afford to Retire?”
42 Add it all up Andrea Coombes, “U.S. Retirement Income Deficit: $6.6 Trillion,” WSJ MarketWatch, September 15, 2010, http://www.marketwatch.com.
43 “That $6.6 trillion” Anthony Webb, interview, January 20, 2011.
44 The corporate pension shortfall The Pension Benefit Guaranty Corporation gave an estimate of $504 billion. Pension Insurance Data Book 2009 14 (Summer 2010): table S-49, http://www.pbgc.gov.
45 City and state pension funds Peter Whoriskey, “Economists: State, Local Pension Funds Understate Shortfall by $1.5 Trillion or More,” The Washington Post, March 3, 2011.
46 “Our nation’s system” Bogle, interview, December 12, 2010.
47 “Now this monster” Benna, in Olshan, “Father of the 401(k)’s Tough Love.”
48 Financial professionals Thomas C. Scott, “The Risk-Averse Future,” in “Room for Debate,” The New York Times, online running commentary on the news, March 25, 2009, http://www.nytimes.com/roomfordebate.
49 401(k) system can be made to work Press release, “54th Annual Survey of Profit Sharing and 401(k) Plans.”
50 Has become like a roulette wheel Schurenberg, “The 401(k) Has Failed.”
51 Nearly three out of four “Working in Retirement Is the New Normal for Middle Class Americans, Wells Fargo Retirement Survey Finds,” Business Wire, December 8, 2010, http://www.businesswire.com.
52 Older workers (fifty-five and up) Maria Heidkamp, Nicole Corre, and Carl E. Van Horn, “The ‘New Unemployables,’ ” Issue Brief No. 25 (Chestnut Hill, MA: Sloan Center on Aging & Work at Boston College, November 2010).
53 Even among people seventy-five and up Kelly Greene and Anne Tergesen, “More Elderly Find They Can’t Afford Not to Work,” The Wall Street Journal, January 21, 2012.
54 “Baby boomers will be facing” Excerpt of interview of Teresa Ghilarducci, for the Frontline program “Can You Afford to Retire?,” February 17, 2006, http://www.pbs.org/frontline.
55 “It’s just not adequate” Excerpt of interview of Anna Sullivan for the Frontline program “Can You Afford to Retire?,” February 13, 2006, http://www.pbs.org/frontline.
56 “This is a national problem” Karen Friedman, interview, December 6, 2010.
57 “We need a new tier” Munnell, interview, December 8, 2010.
58 Jack Bogle advocates Bogle, testimony, February 24, 2009.
59 Participation by all employees Teresa Ghilarducci, testimony, House Education and Labor Committee, October 7, 2008; Jacob F. Kirkegaard, “Stop Rewarding the Wealthy,” Peterson Institute for International Economics, in “Room for Debate,” The New York Times, online commentary, March 25, 2009, http://www.nytimes.com/roomfordebate.
CHAPTER 13: HOUSING HEIST
1 “Right here in America” President George W. Bush, remarks on home ownership, Atlanta, GA, June 17, 2002, http://georgewbush-whitehouse.archives.gov.
2 “I didn’t think I made enough money” Eliseo Guardado, interview, October 3, 2010.
3 “The banks are playing to brokers” Kathryn Keller, interview, August 9, 2010.
4 Even so, she got stung Bre Heller, interview, August 4, 2010.
5 “I am a victim” Bre Heller, email to Florida Attorney General’s Office, October 22, 2008.
6 Bre Heller figured her loan Heller, interview, August 4, 2010.
7 Was deep “under water” CoreLogic reported that 11.2 million homes, 24 percent of residential properties with mortgages, were in negative equity on March 31, 2010; CoreLogic, “Real Estate News and Trends: New Core-Logic Data Shows Decline in Negative Equity,” media alert, May 10, 2010, www.corelogic.com/about-us/researchtrends/asset_upload_file155_1435.pdf.
8 “Considering that I lost $250,000” Heller, interview, August 4, 2010.
9 The irony in that episode Robin Updike, “ ‘Friend of the Family’—Washington Mutual New TV Ads Focus on ‘The Little Guy,’ ” Seattle Times, September 3, 1991.
10 Killinger was warned in advance Lee Lannoye, interviews, August 27, 2010, and September 27, 2010. Sen. Carl Levin, summarizing the investigation of Washington Mutual by the Senate Permanent Investigations Subcommittee, identified WaMu’s purchase of Long Beach Mortgage as the pivotal change in Washington Mutual’s loan strategy from prudent conventional lending to borrowers with solid credit records to high-risk subprime lending with the goal of profiting by selling those loans to Wall Street, leading to development of WaMu’s own high-risk, high-profit Option-ARM loans. As Levin put it, “WaMu built its conveyor belt of toxic mortgages to feed Wall Street’s appetite for mortgage-backed securities.” James Vanasek, former chief risk officer at Washington Mutual, testified that bank insiders had warned of the dangers of WaMu’s new high-risk loan strategy. According to Vanasek, “There is ample evidence in the record to substantiate the fact that it was clear that the high-risk profile of the entire industry, to include Washington Mutual, was recognized by some but ignored by many. Suffice it to say, meeting growth objectives to satisfy the quarterly expectations of Wall Street and investors led to mistakes in judgment by the banks and the mortgage lending company executives.” The subcommittee’s ranking Republican, Sen. Tom Coburn of Oklahoma, echoed Levin’s assessment. Coburn said that under Killinger, “WaMu’s corporate culture had no place for individuals concerned about high-risk lending, but instead brushed them aside and ignored them.” Levin and Coburn,
opening statements, and Vanasek, testimony, Senate Permanent Subcommittee on Investigations, hearing on Washington Mutual, April 13, 2010, http://www.hsgac.senate.gov/subcommittees/investigations.
11 Subprime business had to be predatory to succeed Lannoye interview, August 27, 2010.
12 Predatory lending means finding uneducated Ibid.
13 Twice, Lannoye fought Lannoye, interview, September 27, 2010.
14 Congress had opened the door The Depository Institutions Deregulation and Monetary Control Act of 1980 effectively abolished state usury laws limiting rates of interest on first-lien mortgages.
15 Fannie Mae … Freddie Mac Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (New York: Times Books, 2011), 34–40.
16 Long Beach loans made in 2003 Federal Deposit Insurance Corporation, report to Washington Mutual Bank’s board of directors, January 13, 2004, and visitation report by FDIC and Washington State director of banks to Washington Mutual, October 14, 2003, Exhibit 8B, Senate Permanent Subcommittee on Investigations, hearing chaired by Senator Carl Levin, April 13, 2010, http://www.hsgac.senate.gov/subcommittees/investigations. Hereafter “Levin subcommittee.”
17 Long Beach’s record was so bad Ibid. Also, Washington Mutual internal email memo detailing Fitch rating agency review of Long Beach loan performance, April 14, 2005, Exhibit 8a, Levin subcommittee, April 13, 2010.
18 “We were paid by the total volume” Heller, interview, August 9, 2010.
19 “A lot of coaching takes place” Ibid.
20 “It was a fast-buck business” Michael Lewis, The Big Short: Inside the Doomsday Machine (New York: W. W. Norton & Co., 2010), 9.
21 “Loan officers dropped their duty” Heller, interview, August 9, 2010.
22 The obvious potential for fraud Bre Heller, email, November 2, 2010.
23 One-third of the bank’s refinancing loans Cheryl Feltgen, internal Washington Mutual memo, March 17, 2007, Exhibit 40B, Levin subcommittee.
24 “The only way to repay” Lannoye, interview, August 27, 2010.
25 “The big thing was the sign” Heller, interview, August 9, 2010.
26 “A product that was exotic” Kathryn Keller, interview, August 9, 2010.
27 “One guy called me” Eliseo Guardado, interview, October 3, 2010.
28 The Congressional Funding office was closed Freddy Cova, interview, November 11, 2011; Brian Rios, interview with Owen Smith, January 9, 2012.
29 “It was a nightmare” Guardado, interview, October 3, 2010.
30 “There was a high demand for subprime” Lili Sotello, interview, August 30, 2010.
31 “Waves of defaults” Ibid.
32 “The fraud was there” Diane Kosch, interview, August 22, 2010.
33 “Loan officers were fired” Ibid.
34 John Ngo, a senior loan officer U.S. Department of Justice, news release, December 17, 2007, Exhibit 82, Levin subcommittee, hearing April 13, 2010, www.hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf.
35 55 percent of subprime borrowers “Subprime Debacle Traps Even Very Credit-Worthy,” The Wall Street Journal, December 3, 2007; “Policing Main Street,” Newsweek, July 25, 2010.
36 The floating-rate mortgage Heller, interview, August 4, 2010.
37 Terboss spent $200,000 John Terboss, interview, September 2, 2010.
38 Terboss shared with me Homegate Mortgage Company, fax letter, “Proposal for John Terboss, Prepared by Bob Norrris, 10/03/07,” provided by Terboss.
39 “It was a very strange closing” Terboss, interview, September 2, 2010.
40 “I immediately called the bank” Ibid.
41 “This is not how it was represented” John Terboss, fax letter to Washington Mutual, December 11, 2007.
42 “It’s as if the broker” David Leen, interview, August 30, 2010.
43 “I learned that the banking industry” Terboss, interview, September 17, 2010.
CHAPTER 14: THE GREAT WEALTH SHIFT
1 “The American people” Morgenson and Rosner, Reckless Endangerment, xiv.
2 “Our present economic crisis” John C. Bogle, testimony, House Committee on Education and Labor, February 24, 2009.
3 It powered the growth of debt Frank J. Fabozzi, Anand K. Bhattacharya, and William S. Berliner, Mortgage-Backed Securities (Hoboken, NJ: John Wiley & Sons, 2007), preface.
4 Greenspan dismissed the risk Alan Greenspan, remarks, annual convention of Independent Community Bankers of America, Orlando, FL, March 4, 2003.
5 “Greatest global financial crisis ever” Alan Greenspan, citing Federal Reserve data, in “Activism,” International Finance 14, no. 1 (Spring 2011), http://www.cfr.org.
6 “I found a flaw in the model” Alan Greenspan, testimony, House Committee on Oversight and Government Reform, October 23, 2008.
7 Greenspan went on to admit that the crash Greenspan, citing Federal Reserve data, in “Activism.”
8 “A shift in the mortgage product” James Grant, Mr. Market Miscalculates: The Bubble Years and Beyond (Mt. Jackson, VA: Axios Press, 2008), 138.
9 Greenspan hailed this trend Alan Greenspan and James Kennedy, “Sources and Uses of Equity Extracted from Homes,” Finance and Economics Discussion Series, working paper, March 2007, http://www.federalreserve.gov.
10 Greenspan welcomed that mountain of borrowing Greenspan, remarks at annual convention of the Independent Community Bankers of America, Orlando, Florida (via satellite), March 4, 2003, http://www.federalreserve.gov.
11 “Were it not for this phenomenon” Alan Greenspan, testimony before the Joint Economic Committee, November 13, 2002, www.federalreserve.gov/boarddocs/testimony/2002/20021113/default.htm.
12 American homeowners lost trillions Dean Baker, False Profits: Recovering from the Bubble Economy (San Francisco: Berrett-Koehler, 2010), 2; also Dean Baker, co-director of the Center for Economic and Policy Research, interview, October 15, 2010.
13 The homeowners’ share of housing wealth Board of Governors of the Federal Reserve System, “Flow of Funds Accounts of the United States, Annual Flows and Outstandings,” chart B.100, 1985–1994, 1995–2004, 2005–2010, and Current (fourth quarter 2011), March 8, 2012, http://www.federalreserve.gov/releases/z1/Current/annuals/a2005–2010.pdf; and 2011 figures from http://www.federalreserve.gov/releases/z1/Current/z1/pdf.
14 Homeowners lost nearly a 30 percent stake Dean Baker, interview, October 25, 2010.
15 Nearly one-fifth of older boomers Baker, False Profits, 46–56.
16 Greenspan, who credited this process Alan Greenspan, “Risk Transfer and Financial Stability,” remarks, Federal Reserve Board of Chicago, May 5, 2005.
17 “Ordinarily, the instinct” Johnson and Kwak, 13 Bankers, 130–31.
18 Vastly poorer—$9 trillion poorer Federal Reserve System, “Flow of Funds Accounts,” chart B.100, 1985–1994, 1995–2004, 2005–2010, and Current (fourth quarter 2011), March 8, 2012, reports a homeowner loss of equity from $15.3 trillion in 2005 to $6.2 trillion at the end of 2011, figures adjusted for inflation to 2012 values, http://www.federalreserve.gov/releases/z1/Current/z1.pdf.
19 “This elimination of usury law ceilings” Edward Gramlich, Subprime Mortgages: America’s Latest Boom and Bust (Washington, DC: Urban Institute Press, 2007), 16.
20 It also permitted something never allowed Johnson and Kwak, 13 Bankers, 72; Lewis, Big Short, 51.
21 “The most important legislation for financial institutions” President Ronald Reagan, signing remarks, Public Law 97–320, October 15, 1982, http://www.Reagan.utexas.edu.
22 Mortgages loaded “with poisonous features” Gretchen Morgenson, “Some Bankers Never Learn,” The New York Times, July 31, 2011.
23 This law sanctioned the “securi
tization” of mortgages Fabozzi, Bhattacharya, and Berliner, Mortgage-Backed Securities, preface.
24 Lewis Ranieri, a legendary Salomon Brothers trader Johnson and Kwak, 13 Bankers, 72–76; Lewis, Big Short, 8.
25 Greenspan instituted William A. Fleckenstein with Frederick Sheehan, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve (New York: McGraw-Hill, 2008), 120, 128; Board of Governors of the Federal Reserve System, “Open Market Operations Archive: Intended Federal Funds Rate, Change and Level,” accessed March 19, 2012, https://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm; and https://www.federalreserve.gov/monetarypolicy/openmarket.htm#calendars.
26 It gave housing a kick start Asha Bangalore, Northern Trust Company, “Housing Market—Another Information Tidbit,” May 23, 2005, www.northerntrust.com/library/econ_research/daily/us/dd052305.pdf.
27 More than $1 trillion a year Baker, False Profits, 34.
28 A “rocket taking off” Robert J. Shiller, Irrational Exuberance, 2nd ed. (New York: Broadway Books, 2005), 12.
29 In the 114 years Ibid., 12, 20.
30 But Greenspan took heart Alan Greenspan, remarks, Federal Reserve Community Affairs Research Conference, April 8, 2005.
31 “Many homeowners might have saved” Alan Greenspan, “Understanding Household Debt Obligations,” speech to Credit Union National Association, Governmental Affairs Conference, February 23, 2004.
32 He led the Fed through fourteen interest rate hikes Board of Governors of the Federal Reserve System, http://www.federalreserve.gov/monetarypolicy/default.htm. The first raise on June 30, 2004, increased the rate to 1.25 percent, and the final one, on Greenspan’s last day as Fed chairman, on January 31, 2006, raised the rate to 4.5 percent.
33 Housing prices from the late 1990s Shiller, Irrational Exuberance, 13.
34 “The growth of housing prices” Johnson and Kwak, 13 Bankers, 112.
35 Massive defaults were inevitable Shiller, Irrational Exuberance, 13.
36 Gramlich cautioned Greenspan Gramlich, Subprime Mortgages, 6; Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” lecture, Federal Reserve Bank of Kansas City symposium, August 30–September 1, 2007, 106, published in Economic Review (Fourth Quarter 2007), Federal Reserve Bank of Kansas City, http://www.kansascityfed.org/publicat/econrev/PDF/4q07Gramlich.pdf.
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