BRIAN LAMB, CHAIRMAN AND CEO, C-SPAN: Bethany McLean, when we last visited five years ago, Ken Lay was alive, Jeffrey Skilling and Andy Fastow had not gone to prison. And you had written a book called, ”Enron: The Smartest Guys in the Room.” What’s bring us up to day. Do you know where everybody is today?
BETHANY MCLEAN, AUTHOR: Well Ken Lay is in his grave, although questions to the contrary persist, but I actually, as conspiracy theorist as I am, do not think there’s any truth to that particular conspiracy. Jeff Skilling is in prison, although his conviction is currently on appeal at the Supreme Court. And Andy Fastow is still in prison as well.
LAMB: I want to run a very brief comment that you made about how you felt back then, five years ago, and then we’ll continue; talk about your new book.
MCLEAN: I’ve become more cynical than I would like to be about corporate America and about whether people tell the truth and about whether people live up to the responsibilities that being a corporate citizen entails. I think our American system makes it possible for people to make great sums of money, be they accountants, lawyers, members of boards of directors, corporate executives, and I’m not sure that the concurrent or commiserate level of responsibility comes with that.
I think the corporate culture has been corrupted by this get rich quick notion. Make your quarterly earnings estimates, get the stock to go higher, get your options and the money and cash out, and you know who cares what happens next? I’m gone and I’ve made my money. And I see that; I see that pretty frequently and I think that’s just such I think that’s really terrible, not just because it’s a betrayal of responsibility, but it’s also betrayal of possibility.
LAMB: Would you change anything?
MCLEAN: I would almost say that I wasn’t cynical enough, because if you had asked me back then if we were going to have another financial crisis, this one much bigger that makes Enron look like a canary in a coalmine or just a little hiccup before the big explosion, I would have said oh, it can’t possibly happen for a while. We’ve learned some lessons, surely; and I would have been completely wrong.
LAMB: Correct me where I’m wrong, but your life has changed a lot since during the last five years. You were living in New York.
MCLEAN: I was.
LAMB: And now you’re in Chicago.
LAMB: You’ve remarried.
MCLEAN: I have.
LAMB: Do you have children now ?
MCLEAN: I do.
LAMB: How many?
MCLEAN: I have one child and another on the way, so.
LAMB: And then you were working for Fortune and now you’re working for Vanity Fair.
LAMB: So tell us before we get into all the rest of this stuff, how did how did all this happen?
MCLEAN: Well I met my husband in the world’s most surprising way. He was actually the prosecutor of on the Enron team. He was the lean Enron prosecutor and we were both divorced at the time we met and lo and behold, strange I guess people meet in all sorts of strange places and life takes some very strange twists, because if you had asked me when I lived in New York and worked for Fortune if would ever leave Fortune or ever leave New York, I would have said absolutely not and here I am.
LAMB: And why going from Fortune to Vanity Fair? What’s what do you do with Vanity Fair now?
MCLEAN: You know in a way it’s not so different and I loved Fortune and am extraordinarily grateful to the magazine for the for the freedom I got when I was there. Vanity Fair is one of the few magazines that routinely runs very long investigative pieces you know 7, 8, 9000 words and even Fortune only rarely does that. And so there’s a little more freedom of subject matter at Vanity Fair, although right after I got there the financial crisis really hit in full force, so I found myself doing just the same sort of stories I probably would have worked on at Fortune.
But it was mainly for me. I’d spend 13 years at Fortune and my entire career as a journalist and that was all I knew. And I think it’s important you learn something about yourself by moving to a different place; sometimes good things, sometimes bad things, usually both, but those are important lessons, I think.
LAMB: Bringing everybody up to day, born in Hibbing, Minnesota, 1970, Williams College, graduated in 1992, spent three years with Goldman Sachs, 13 years with Fortune, and went with Vanity Fair in 2008.
LAMB: Up to where we are now; brand new book. This book is called ”All the Devils Are Here: The Hidden History of the Financial Crisis.” Where’d you get the title?
MCLEAN: You know just as our publisher came up with the title, ”The Smartest Guys in the Room,” I have to give credit for this one to my publisher; they came up with the title. But it’s actually a line from Shakespeare and since we heard it, my co-author and I both said that’s perfect.
LAMB: Where did you start thinking about this book?
MCLEAN: We started thinking about it in the fall, as the financial crisis was hitting in full force; September 2008. My co-author, Joe Nocera, who was my editor at Fortune and then who edited me; who edited ”The Smartest Guys in the Room,” was in Chicago actually working on a column and we were sitting in my house and he said we should do a book together about the financial crisis. At that point in time, we thought it was a unique, original idea. We were soon disabused of that notion.
But and I thought I wasn’t so sure about embarking on another book. The last one was a really difficult process and I that was still too fresh in my mind, but I have the utmost respect for Joe and the ability to work with him again, plus be able to spend you know a couple of years thinking about something that I was really interested in and delving into all these tales that otherwise I’d never really be able to delve into, I thought OK, sign me up.
LAMB: Well as you know there have been a lot of documentaries and other books written. What how is your approach different from everything else?
MCLEAN: I think it is a really different book. I fully believe that you only have in you the one book, the and you can’t you may think you should write a different book, but you but you can’t do that. And so from the very beginning, we wanted to tell the history of the financial crisis. We wanted to go back 20 years in time and talk about all the things; all the various strands that had to come together in order to create this, and they’re very different strands, and pull it together into a narrative. And we definitely had moments of second guessing that one.
For example, Andrew Ross Sorkin’s great book came out and you know it’s just the wonderful blow by blow of the of the meltdown on Wall Street and you think oh; should we should we should we have done that? And of course at that point you also think thank goodness we didn’t we didn’t do that. But I think the book that we wrote the book that we set out to write and it is and it has ended up being pretty different than anything else that’s out there.
LAMB: Explain the difference.
MCLEAN: Because it really goes back in time. It starts in the 1980s, with the invention of mortgage-backed securities, or the modern invention of mortgage-backed securities, through the characters who were there at that time. It traces the growth of both subprime lending and of Fannie Mae and Freddie Mac in Washington DC. It traces, on Wall Street, the growth of various means of measuring risk and other financial tools, like credit default swaps and it traces the changing morality on Wall Street, and it really tells you the history of Countrywide.
So it’s a different and it ends, right, with the conservatorship of Fannie Mae and Freddie Mac in the fall of 2008. So it’s not a blow by blow of the meltdown. It’s rather a history of the event that led us up to the meltdown, told in, I hope, a character-drive, narrative way.
LAMB: Why did you start with this sentence? Stan O’Neal wanted to see him.
MCLEAN: That it’s a fascinating example of, I think the power that one man has over a company and the really untold story of how Merrill Lynch, once one of America’s great companies, was brought to the brought to the brink of destruction; only saved by a last minute merger, through really just the actions of a few people and this chain of events that is almost just remarkable in hindsight, where this incredible exposure to these disastrous subprime mortgages accumulated on its balance sheet, without Stan O’Neal, who was then the CEO of Merrill Lynch, even knowing that that was happening.
LAMB: Where is he today?
MCLEAN: He is, I think, still trying to recover from what happened at from what happened at Merrill Lynch. You know this crisis, although I suppose I have, over the years, as much as I say I’ve become more cynical, I’ve also developed, I guess more sympathy for the mistakes that people make and the devastation that they suffer when they when they when they make those mistakes. And I think it’s easy to look at a man like Stan O’Neal or a man like Angelo Mozilo and say you know send them send them to hell. Look at what they did to our economy. Look at the money they took out of their companies.
But on another level, these were very proud men who believed in the companies they created and will always be remembered as failures because of because of what happened. And that, to them, I think is worse than any prison sentence could be.
LAMB: I suspect there are a lot of people watching right now that say I don’t care what happens to those people.
MCLEAN: I suspect that too.
LAMB: I not only that; I hope that suffer. Do you have any evidence in all and you have, out front in this book, 100 names.
LAMB: Of 100 different players in this whole story.
LAMB: Do you have any evidence that any of these folks that ran any of these big financial institutions are suffering?
MCLEAN: Any evidence. Getting to know people through the course of reporting a book, you come to see what means the most to them and the extent to which people are define themselves by their professional accomplishments and their pride in what they think they’ve built. So it comes down to a question of what you call suffering. To Americans who have lost their homes and are struggling to meet their bills in the wake of the financial crisis, no; these people aren’t suffering. They’re not suffering in terms of material wealth.
If you think about your sense of the world and your faith in yourself being destroyed when you’re 60, 65, 70 years old and having to look in the mirror with a very different reality than you’d thought you were facing, I think I think that can be I think that can be can be devastating. And I’m not I’m not saying it makes up for what for what for what they’ve for what people think they’ve done and I’m not saying it’s suitable punishment. I’m just saying there’s a human level of pain there.
LAMB: Take Stan O’Neal. He ran Merrill Lynch. How big was Merrill Lynch?
MCLEAN: Merrill Lynch was a huge company. At its peak it was one of the one of the five big broker dealers on Wall Street, employing tens of thousands of people. It was the thundering herd. I mean this was and it was an immensely proud company with a really long history and legacy. And all of that’s gone and Stan O’Neal was a man like some in American business, who really came from nothing and beat back incredible prejudice and rose to be rose to be a really prominent African-American CEO and there’s a there’s a tragedy in his in his fall, as much as I think when you read the book, you see that he brought it on himself.
LAMB: And I don’t know how you pronounce the fellow’s name; is it John Breit or Breit?
MCLEAN: John Breit.
LAMB: Breit. Your prologue, which is only three pages long, is about John Breit. Can you give us some background on what that what happened there that made you lead the book with that?
MCLEAN: Well he’s really a risk manager who came to understand how bad Merrill’s exposure to the subprime mess was and he had been sidelined under Stan O’Neal’s Merrill Lynch, which is really how this was able to take place; how Merrill Lynch was able to accumulate all of this junk on its balance sheet without anybody knowing. It was the slow sidelining of risk management; a critical function on Wall Street, but one which I think we’ve all discovered, exists in name only at many firms and that over Stan O’Neal’s tenure at Merrill, it was slowly dismantled and pushed aside in a way that O’Neal didn’t even understand what he was doing.
So this story that we told at the beginning of the book is about this moment of realization that doom that doom was upon us and it’s, to me, a very a very human story, which is part of the reason why we wanted to start with it.
LAMB: Did you talk to John Breit?
MCLEAN: You know we could never for this most of this book, as in the Enron book, most people didn’t want to be didn’t want to be quoted. There’s still enough while the government has not brought very many, if any well a few; criminal cases, there’s still enough noise swelling around all this that people don’t people don’t want to be dragged into it. So the book is the book relies fairly heavily on anonymous sources.
LAMB: Well the only reason is because you actually quote John Breit in here.
LAMB: And Stan O’Neal, so one
or the other, it seems you actually had to talk to.
MCLEAN: Sometimes quotes come from third from third parties who observed who observed the events and were in the rooms and other times they come from they come from people who were there.
LAMB: Can you tell us; give us some examples of people who refused to talk to you?
MCLEAN: Let’s see; people who refused to talk to us. Well one person who I would have loved to have spoken to, he didn’t so much refuse as was unable to talk to us, was Roland Arnall, who died in the spring of 2008 and he really in many ways was the pioneer, the founder of subprime lending, despite the fact that Mozilo was often given that honorific or extreme negative. And Arnall is just a fascinating character; stayed very, very private man, not a well known name because he never took any of his companies public and never was the CEO of any of his companies. Other people were always the face; the face person.
And he became a huge political donor and was appointed the Ambassador to the Netherlands by George Bush in 2004, just I’m sorry; 2006, when his company had just settled the largest predatory lending accusation by the attorney state attorney generals ever. And at the time, which is just astounding, no one paid attention to this. Right, though once the largest subprime lender in the country just paid 325 million to settle accusations of predatory lending. Is something happening here we should all be aware of? And it rolled off. It rolled off all of us, I think.
LAMB: What did he die of?
MCLEAN: He died of esophageal cancer.
LAMB: And go back to the founding or the person that invented subprime mortgages. Where did it start?
MCLEAN: It really started out as so-called hard money lending, so the practice of, say you know somebody buying a refrigerator and paying an exorbitant interest rate in order to and you the loans would be heavily collateralized and this grew into second lien mortgage lending, where people would take out these you know really high interest rate second liens on their homes in order to basically pay for their daily expenses. And hard money lenders were a small, kind of tough bunch who really excelled in knowing their consumer and getting enough collateral that they that they got their money back.
And with the slow liberalization of the laws surrounding mortgage lending, which we which we recount in the book, and then the end of the S&Ls and the well first the liberalization of the rules surrounding what S&Ls could do and then the end of the S&Ls, you had a whole new breed of people start mortgage lending and it really took off in the 1990s. And the thing that fed it, in addition to this relaxation of the rules, was the advent of securitization, because in the past, if you were a lender, you would have to find somebody to finance your loans. And if you were a small, fly-by-night lender, well how did you get the cash to go out and make mortgages, so you know to coral together investors and it was a slow, painstaking process.
But with the advent of securitization, you could bundle up these loans and you could sell them to Wall Street, which would sell them on to investors in the form of securities, which would get a really high rating from the credit rating agency by virtue of all these financial engineering techniques and so the business just exploded. And you had this really, what we like to call, subprime one in the 1990s, which was the first wave of subprime lending and really ended badly and it’s just another shocking canary in the coalmine type example, because people didn’t pay any attention to the fact that this ended really badly once before.
LAMB: Can you still buy securitized loans of packages of mortgages?
MCLEAN: You can if they go through Fannie and Freddie. Right now, Fannie Mae and Freddie Mac, the two government sponsored entities that were taken over by the government are basically the only game in town. And so investors are unwilling to buy mortgages unless they have Fannie and Freddie’s stamp on them, meaning that basically now they are explicitly backed by full faith and credit of the of the United States government. Whereas in and the so-called private market, which was these companies that would sell their loans directly to Wall Street and they wouldn’t have a government guarantee on them has been pretty much shut down in the wake of the crisis.
LAMB: In your epilogue, at the end of your book, you say perhaps the most glaring omission in the new law was any mention of Fannie Mae and Freddie Mac.
LAMB: With everything that happened in the two years since the crisis, neither the administration or Congress has done anything to change the status of Fannie Mae or Freddie Mac.
MCLEAN: Because it is such a difficult problem to answer. Fannie and Freddie, the government sponsored enterprises, as they’re known, became deeply imbedded in our housing market. They are part of what’s known as the secondary mortgage market and it’s this invisible part of the machinery of finance to most Americans, but a but a very critical one. So Fannie and Freddie would buy mortgages that were made by mortgage makers, by originators, stamp them with their guarantee, meaning that nobody had to worry about the credit risk because Fannie and Freddie promised you’d be paid back, and turn around and sell them to investors.
And they became enormously controversial companies, enormously powerful, politically powerful and financially powerful, which the book traces, and enormously, enormously just controversial. And in the wake of this you’d think, when the government has to take them over and we’re on the hook for untold billions of losses, you’d think obvious; shut them down, right? But without Fannie and Freddie today, we don’t have a mortgage market, because there are no private lenders who are out there, willing to make loans. Fannie and Freddie and the FHA, the Federal Housing Administration, basically account for the mortgage market today. So you’re in this conundrum of what do you do? How do you yank these enterprises out from under the market when they are the market?
LAMB: Tell me where I’m wrong. This is an observation; we do not know anything about Fannie and Freddie today. They’re not written about in newspapers to any degree. There is no face on them. We don’t know who runs them. We don’t know how many people I suppose we could find out how many people work there. But I remember we asked one time, just to get a list of the board of directors and they said we won’t give that to you unless you write us a letter.
MCLEAN: Did they really? That’s astonishing. It’s you know it’s interesting. They were always such an odd mixture of partly public, partly private, partly government-owned companies. They were huge forces on Wall Street, but they were located in Washington DC, so they were always these strange breeds of companies. And now that they’re owned by the government, in effect, they’re even stranger, basically, because they are run by their regulator, so run by the government and it’s really hard to determine for what purpose they’re being run.
Are they being run to minimize taxpayers’ losses and make as much money as possible? Or are they being run to support the housing market, possibly at the cost of to taxpayers? So it’s you’re right; there’s a shroud of secrecy over them now.
LAMB: Did you talk to anybody at Fannie Mae or Freddie Mac then?
MCLEAN: The book the book focuses extensively on Fannie Mae, so it’s safe to say I talked to a lot of people who used to work there. But most of the old Fannie Mae people are gone. When Fannie Mae was put into conservatorship it had to fire its CEO and most of the top executives left and that’s you know one thing Fannie Mae people will complain about; well Wall Street firms didn’t have to fire their CEOs when they took the government’s help.
LAMB: Your third chapter is the Big Fat Gap.
LAMB: And it starts out this way. In 1991, David Maxwell retired as the chief executive of Fannie Mae. He was 61 years old and had held the post one day short of ten years. He walked away with a lump sum of 27.5 million; most of it accrued retirement benefits, but still a shocking sum of money for Washington during that era. And this a outfit that had a board of directors that included five presidentially appointed members.
LAMB: Twenty-seven point five million and I know that’s not even the highest figure that you’ve gotten out of people that worked there.
MCLEAN: No, definitely not. You can argue that David Maxwell earned his money. He took what was a failing enterprise. It was on the verge of going broke when he stepped in and turned it into a phenomenally profitable enterprise and one that I think during those years did decently managed these twin goals of being profitable while also supporting the housing market.
But over time, and I blame the change in Wall Street culture a lot for this; Fannie got seduced Fannie and Freddie got seduced by the same enemy that so many corporations fall danger to, which fall prey to, which is just relentless profit growth at all costs. And if you’re supposed to be a mission-oriented company that is supposed to have this other reason for its existence beyond producing profits, that becomes a pretty difficult conundrum over time.
And the Big Fat Gap in the title refers to a way that Fannie and Freddie made inordinate profits, which was taking advantage of their ability to borrow money at a very low rate, because investors assumed they were backed by the U.S. government and buying mortgage-backed securities with that and basically just earning the difference. And it was Alan Greenspan who became a big foe of the GSEs who referred to that as the big fat gap.
LAMB: So what did David is he still alive?
LAMB: Have you did he talk to you on the record?
MCLEAN: He did, yes.
LAMB: And what did you what did he do over those ten years that was specifically that saved Fannie?
MCLEAN: Well he took a company that in fact that was the Washington Post had an article that said it was heading toward the biggest disaster in modern financial history you know going broke at a phenomenal rate. It was run kind of like a government enterprise without a lot of focus on its on its on its bottom line at all. And it, like many of the S&Ls, had bought mortgages and at a time of rising interest rates and so was stuck with fixed-rate mortgages paying one thing while it’s cost of funding was going through the roof and so money was just going out the door every single day.
And Maxwell started to run it more like a business; demanded accountability on the part of on the part of managers, changed some of Fannie’s policies and procedures so that they no longer commit to buying a loan at any interest rate from someone you know a year in advance and then be stuck with that loan, even when it turned out to be unprofitable. So you could you could argue that Maxwell set Fannie on the course of being a bottom-line oriented company, but like everything in life, there’s a balancing act.
LAMB: Well you point out that he passed it on to Jim Johnson.
LAMB: And I’m reading from your book, read (ph) a Democratic operative, a tall, 47-year-old Minnesotan and a graduate of Princeton; Johnson was, as they say, a player. He had spent his 20s working on the campaigns of Eugene McCarthy and George McGovern and then served as Vice President Walter Mondale’s executive assistant during the Carter administration. Did Jim Johnson get the job because of his political connections?
MCLEAN: I think it was a mixture. I actually I think the political connections were almost a deterrent at the time. I was told a story about how some of the Republican board members were incredibly offended by Jim Johnson and didn’t want him to become the CEO of Fannie Mae. But he did have these deep political connections and I’m sure that David Maxwell was savvy enough to see how important those would be to Fannie Mae in the coming years, because Fannie was constantly fighting this battle with Wall Street and with others in the mortgage industry that wanted some of its very lucrative turf.
But Johnson was also a businessman. He’d worked at he’d worked at Shearson Lehman and had enough of a business background that he wasn’t he wasn’t a pure political operative.
LAMB: You quote him saying we’re going to cut them off at the knees.
MCLEAN: He was very much regarded as a very, very tough operator by the people who worked under him and by people who dealt with him; a take no prisoners attitude. And some of that was bred into Fannie Mae’s DNA. They always had this sense that people were trying to kill them off and it was true. Fannie always had foes in the government who would have liked nothing better than to see the end of Fannie Mae and so the company always felt that it was fighting for its very survival. And so over time that hardened into this into this very, very fierce take no prisoners approach to the world.
LAMB: You know most of the media have put Paul Volcker on a pedestal during this process.
LAMB: And the reason I mention that is because you write here, in 1990, even before Johnson took over as CEO, Fannie Mae engaged Paul Volcker, the legendary former Federal Reserve chairman, to defend Fannie Mae’s low capital levels.
MCLEAN: Yes, yes. I think it is a testament to the low risk that everybody believes mortgages had and in fairness, they probably did have that low a level of risk. What people at the time couldn’t have foreseen were or didn’t foresee were the changes in the mortgage market that made mortgages carry a much higher level of risk at the time and the changes in Fannie’s business that led it to carry far more leverage than it did; than it did then.
LAMB: So over the years, why didn’t the government pay much attention to them?
MCLEAN: Oh, they did. People tried desperately, particularly the Bush administration, to reign in Fannie and Freddie. Alan Greenspan would actually publicly say that their portfolio, the amount of mortgaged they housed on their balance sheet needed to be capped. And the very blunt answer is that Fannie and Freddie were simply too politically powerful for anybody to do anything.
Well in a sense that’s too blunt an answer, because people were also scared. People were scared, as they are today. What happens if you take them out of the mortgage market? What happens if they’re right and the housing market can’t function without Fannie and Freddie? We’ll get the blame. And so there was both there was both a paralysis due to their political power and a paralysis due to fear.
LAMB: What role did the foundation play where they had money that they spent on philanthropic projects throughout Washington? They contributed tremendous amounts of money to
politicians and there was a constant revolving door of politicians coming in and out of Fannie and Freddie.
MCLEAN: Really, the foundation is a part of why Fannie’s lobbying apparatus was regarded as the most the most politically powerful, potent force that people that people have seen. I’ve got a quote in there from former Congressman Richard Baker saying basically General Patton couldn’t have couldn’t have stood up to them. It was 24/7 and never anything left to chance and people talk about the sheer amount of money that Fannie and Freddie lobbying, but that pales in comparison to the other ways in which they bought influence, whether it was via the foundation or whether it was via these partnership offices that they opened all over all over the country or the revolving door, as you mentioned, that they people went back and forth between Fannie Mae and Washington D.C. Tom Donilon, who will be Barrack Obama’s new chief of staff, was once a high-ranking Fannie Mae executive.
LAMB: You mentioned Richard Baker. Didn’t he leave the Congress to head up a trade association in the financial world?
MCLEAN: That he did. That he did, so the revolving door is nothing unique to Fannie.
LAMB: You write up you have a chapter where you talk about Robert Rubin and I believe Larry Summers.
LAMB: There were three of them, total, involved in it. Again, the whole business of people coming in the government, going back to the financial industry, coming back into the government.
LAMB: How much of that did you find?
MCLEAN: There is there is awful lot of that. There is an awful lot of that and I think you can look at that through two prisms and you can look at it through one prism in which you say how great; people make their money in the financial world and they come to the political world to share their wisdom and their insights into the real world with the rest of us. How wonderful that these people, after making fortunes, are willing to give that up and devote time to public service.
You could look at that through a far less benign lens and say that the ultimate form of corruption is not someone explicitly doing a someone else a favor, but the form of corruption that happens when everybody already thinks the same way and that if you have this revolving door, particularly between government and Wall Street, you’re likely to get a lot of people who think the same way in positions of power. And then you don’t even you don’t need explicit corruption. You don’t need any favors because you all already agree anyway.
So what have you found? I mean you’ve got a big book here; almost 400 pages. Was this preventable?
MCLEAN: It was it was preventable in the early years. Be the time 2005, 2006, I think it would have been very difficult for one person stepping in to have taken an action that would have that would have prevented what was coming. But so the crisis isn’t a story of the crisis as we’ve told it isn’t a story of big decisions made by big people. It’s a story of corruption or banality or wrongdoing at all at all or invention simply gone wrong, pushed to a place they weren’t they weren’t meant to be taken, at all at all layers.
And so you had to have this transformation of subprime lending. You had to have the mortgage become this product that it hadn’t had never been in order to provide, basically, the raw material for the for the leverage that eventually took the system down. You had to have this unwillingness to reign in the amount of debt that was that was in the system for it to become a problem. And you had to have the invention of all these complicated financial tools on Wall Street. And so you had to have these disparate things kind of come together to make a to make a crisis of the size that we had.
So I think it was preventable in numerous ways or at least mitigatable is that a word, in numerous ways along the way by regulation or oversight of derivatives, by tighter regulation of investment banks, by smarter regulation of banks and investment banks, by some sort of action in the mortgage industry, given that was the shocking thing to me, were the warnings from consumer activists staring in the in the 1990s about predatory lending and yet you didn’t have the federal regulators do much of anything until 2006, when it was when it was far too late.
So preventable, yes, but in the paths along the way; not in something someone could have stood up and shouted from the rooftops in 2006. We’re going to have a financial crisis unless we do X, Y and Z. Does that make sense?
LAMB: What did you at when you were at Goldman Sachs years ago, in the early ’90s?
MCLEAN: I worked for two years as a analyst in the in the investment banking department in Goldman’s mergers and acquisitions department. And then I spent a year working for what’s known as the Whitehall Funds, which at the time was a Goldman fund that invested in distressed real estate.
LAMB: What did you see there?
MCLEAN: You know I was very young when I worked there and probably younger in facts than I was in years. I was a naοve kid from a mining town in Minnesota who found herself working on Wall Street. It was an eye-opening experience in terms of, I would say how hard people worked and how motivated people were by money. And those were and that stood out to me.
I never saw I came away from Goldman Sachs and my time there as an admirer of the firm. I wouldn’t say those were the easiest three years of my life. In fact, in some ways I’d say they were the hardest, but I but I felt like I grew up a lot and learned an immense amount by working there and so I guess I have retained a level of loyalty to the place over the years.
LAMB: What about during this time period, where this whole business of them getting bailed out?
MCLEAN: Yes, yes. I think my view began to change. I did a and I and I was always an admirer of Goldman’s success too and of their, unlike other firms on Wall Street who merely talk about risk management, Goldman Sachs actually practices risk management.
But there was always this underlying complaint about Goldman Sachs that you would hear whispered. Nobody would ever say it on the record, but the Goldman culture had turned rapacious; that it was profits at any at any cost, that this whole notion that the first business principal was our clients. Our clients come first was just completely meaningless; that they would run over a client in the in the in the search in the search of enriching their own bottom line.
And I listened to the complaints, but it was and they were loud enough that it was hard to discount them, but it was also really hard to find any proof that this that this was happening, because nobody would go on the record and complain about Goldman. And to me, the really telling thing about the about the financial crisis was that it does show Goldman’s culture had changed since the firm had become a public company and it’s really hard to look at their actions during the financial crisis and say that this is a company who believes that our clients come first, unless you very narrowly define the word client.
LAMB: A couple weeks ago, Frank Rich, who is a liberal columnist for the New York Times
was wrote about this and I was reading your book and his column at the same time and I want read it back to you, just to see what your take is on this.
LAMB: He said no matter how much Obama talks about his tough new financial regulatory reforms or offers rote condemnations of Wall Street greed, few believe there’s been real change.
LAMB: That’s not just because so many have lost their jobs, their savings and their homes. It’s also because so many now or so many know that the loftiest perpetrators of this national devastation got get out of jail free cards; that too big to fail banks have grown bigger and that the rich are still the only Americans getting richer.
MCLEAN: Yes. I’m not sure I would put it exactly the same way that Frank Rich does, but I don’t disagree with the with the sentiments underlying that. It is indisputable that a really sick, dare I say, byproduct of the financial crisis is that, should they just fail firms have gotten bigger, that we bailed the biggest institutions, which became even bigger and more powerful and now we have even less diversity among financial institutions.
Why not just break them up? Make them into small firms, so we don’t we don’t even need to go through all this all these legislative contortions about how you make a how you make a firm fail. And I don’t I think it will be very difficult if we are faced with the failure of one of these firms to actually to actually let if fail.
And I think that the underlying issues of the financial crisis have not been fixed at all and indeed there’s no easy fix. And they are one thing is similar to what we talked about when we talked about Enron five years ago and it’s this culture of short-term greed. If I can get mine and get out then who cares what happens after I’m gone. And that’s an attitude that I think is pervasive across Wall Street. There isn’t a sense of larger of a larger right and wrong and I don’t know how I don’t know how you fix that.
The other issue to me is that this crisis; people want to phrase this as a crisis about homeownership. In other words, this was a crisis caused by putting people in homes that they couldn’t afford and it really wasn’t. If you look at most subprime loans, they were used so that people could do cash-out refinancings of their of their homes. In other words, use their home like an ATM card because people aren’t making enough money to support the lifestyles that they and our economy has have gotten have gotten used to.
And that’s a huge underlying problem. That’s not a quick fix about America’s homeownership policy. That’s not that’s not any kind of quick fix. That’s just a huge underlying problem and I don’t I’m not sure what the fix is to them (ph).
LAMB: He writes a little more about the banking industry. He said there’s a he called it an outrage. It’s this is Frank Rich. Its disregard for the rule of law as it cut every corner to process an avalanche of foreclosures. Clearly these financial institutions have learned nothing in the few years since their contempt for fiscal and legal niceties led them to pedal these predatory mortgages and the reckless financial products concocted from them in the first place and why should they have learned anything? They’ve often been rewarded, not punished, for bad behavior.
MCLEAN: I think, unfortunately, that that’s that is that is mostly true. I would caveat it by saying that some of the banks who are engaged in the foreclosure mess today are not the same firms that were involved in pedaling subprime mortgages and it’s easy to put everything under the rubric of the financial industry, but in fact it’s quite a mass of disparate actors, so it would be nice to be able to hold Bank of America up and say well, it owns Countrywide, therefore it’s accountable for all of Countrywide’s sins in the past. But if the executives and the people who ran Countrywide are no longer there, is it is it is Bank of America really accountable?
I mean legally they are, but you see what I’m where I’m going, since this is a since this is an ethical question. But I do think it is it is the for better or worse, the story of the financial crisis is a story also of trying to find the line between banality, greed, corruption, outright corruption, outright fraud. And most of it is somewhere in the murky middle. And as much as we may abhor certain behavior, it may not be criminal.
And you can’t, just because you are disgusted by behavior, you can’t say it’s criminal when it’s when it’s not. And I don’t believe that firms aren’t being prosecuted because of some sort of political agenda not to prosecute. Then the southern district of New York is a very independent and powerful prosecutor and if they were finding myriad examples of prosecutable fraud, they would they would prosecute.
You know Countrywide case against Angelo Mozilo and a couple former executive settles on the eve of trial and it settled because it was a civil case and it settled because the case wasn’t iron clad. And that’s it’s a very tough thing to come to terms with because we as a country, we like our we like our villains you know. Makes us all feel better when we’ve suffered something as devastating as this to be able to hold up someone, something and say look; that’s what’s to blame. And when you have instead this murkiness, it’s it makes the whole thing even harder to comprehend.
LAMB: Are there still such things as credit default swaps?
MCLEAN: There are. There are such things as credit default swaps, yes.
LAMB: What do they do? And as people say, ah come on; what does that mean? What is a credit default swap and can I buy one?
MCLEAN: Let’s see. You could buy one on me. If you were going to bet with somebody; you were going to you’d have to find a broker, but you could make a bet that Bethany’s earnings were going to deteriorate dramatically in the wake of her book coming out; that this book is not going to be a success. And so you could buy an instrument that would pay you if I crash and burn. And that would be that would be a credit default swap.
You’d have to find somebody who’s willing to take the other side of the bet who is going to say no; Bethany McLean is going to excel. Then you’d basically set up a contract between the two of you in which you’d agree payments to be made and adjusted measures of my success or failure.
LAMB: Isn’t it just gambling?
MCLEAN: You know it didn’t start out as gambling; nothing on Wall Street every does. So it started out as fairly legitimate. Say I’m Bethany Mclean; I might want to buy a credit default swap on myself because then, should I crash and burn, I have protection. I have I have something that pays me; that compensates me for my crashing and burning.
So if you have a Wall Street firm that has made a loan to General Motors and has General Motors debt on its books and they can buy an instrument that protects them should General Motors default, well you can see that that ’s legitimate. But like everything on Wall Street, it something that starts as a good idea gets taken to a speculative frenzy. And so credit default swaps eventually became a means of betting on the demise of companies that, one, had no connection to the underlying to the underlying debt and of structuring these just insanely complex investments based on mortgages.
LAMB: Now you were the last time I talked; bit on selling short, or not selling short, but having short sellers.
LAMB: And have you changed your mind on that? And if you haven’t; why not?
MCLEAN: I think
LAMB: And explain what they do.
MCLEAN: Sure. I think it’s a complicated question. In the stock market, I am a fan of short sellers. And what short sellers do is they basically are betting that the stock of a company is going to go down. And because they are making this bet they do detailed, extensive research in order to uncover financial frauds, in order to uncover weakness in a company’s accounting, and they do the sort of research that most people in the market don’t do, because face it; we live in an economy where everybody wants things to go up.
And that leads to frauds going unnoticed, because most frauds, like Enron, take the complicity of the victim and the victims are all too willing to be complicit, because all of our money is in it is in it as well. And I think short sellers provide an incredibly important leavening for us against that. I you really have to think twice about that when it comes to mortgage-backed securities.
In an ideal world, the fact that there were people shorting the mortgage market would have sent a signal to everybody saying wow; there are all these smart investors who think this think is going to crash and burn. But the market was opaque enough that nobody; you couldn’t see that the way you can see it in the stock market. And because of the way these instruments work, you would basically, not betting on real mortgages, but rather you inventing on the casino version of a mortgage, so it ended up multiplying the exposure to mortgages; to souring mortgages that was out there and multiplying the damage done by the by the financial crisis. And I’m not sure; it’s hard for me it’s hard for me to argue the social utility of it in the in the mortgage industry.
LAMB: Can you still buy a subprime mortgage?
MCLEAN: Can you still by a I don’t think so. There may be a little bit. I’ve heard rumors of some subprime lending coming back around the edges.
LAMB: Explain what a subprime mortgage is.
MCLEAN: So a subprime mortgage is basically a mortgage made to anybody with a low credit score; anybody it used to be anybody who didn’t qualify for a Fannie Mae or Freddie Mac mortgage, anybody who didn’t qualify for a conventional mortgage. So you probably paid a higher interest rate. Your mortgage might have some special fees that apply to it and it the higher interest rate was supposed to be because you were a worse credit risk. But you could still get credit by getting by getting a subprime mortgage.
And once again, in theory and in balance, that’s a great idea. Do we as a Fannie Mae executive said to me, do we want to live in a in a in a country where, because you have a blemish on your credit you can never own a house? Well no; probably not. But balance seems to be a thing that’s all too often missing in this world. And things are created and they go to extremes without ever pausing at sort of the proper middle.
LAMB: You have a chapter; Why Everyone Loves Moody’s.
LAMB: Or loved Moody’s.
MCLEAN: Loved Moody’s; I think past tense is operative.
LAMB: Or is it? I mean don’t they still rate?
MCLEAN: That’s a good question; that’s a good question.
LAMB: And explain I mean Moody’s, Fitch, SP.
MCLEAN: Yes. These are the so-called credit rating agencies and they are to most people, they were a hidden but very colorful part of the financial; of the machinery of the of the financial markets. They rate debt, so they’re supposed to be able to tell you when debt is going to be paid back on time and in full. And a triple A rating, which the United States has, perhaps arguably today, but which the United States has; basically means that you’re pretty assured of getting your of getting your money back. And triple As were supposed to be handed out very sparingly, I think I’m going to get the number wrong. We have it in the book, but less than a dozen corporations warranted a triple A rating.
And you know credit rating agencies are funny because they’re this ability to rate debt makes them incredibly powerful, because as a company you can’t sell debt without their sometimes without their approval. I mean their but their you know their staff they’re not flashy like Wall Street firms. People there are kind of academic, kind of nerdy, kind of staid. They never made the salaries that people on Wall Street did.
So they were really kind of the little the little the little gremlins down in the basement making the making the gears work. But with the advent of this thing called structured finance, which is making securities out of out of mortgages, they became incredibly, even more powerful than they were, because the whole purpose of securitization was to take something that was risky, a subprime mortgage, and turn it into something that looked really safe. And in order to do that, you needed the stamp of approval of the credit agencies.
And it was Moody’s and S&P and Fitch who rated just mammoth portions of these mortgage-backed securities with a triple A rating. They handed them out like candy. So this once pristine, really highly cherished rating really became quite degraded over the years.
LAMB: You talk about a man named Brian Clarkson.
MCLEAN: A lot of people in the end, changes in culture are often traced to one person and it never fails to be remarkable to me the impact that one powerful person can have on the character of an organization, whether it’s Sam O’Neal at Merrill Lynch or Brian Clarkson at Moody’s and
LAMB: Just to put vernacular on it; you say he had a reputation for being nasty.
MCLEAN: Yes. Many former people at Moody’s point to him as the source of a of a cultural change at Moody’s. Moody’s used to pride itself on, basically, we don’t care what issuers, the investment banks, the companies whose bonds we rate; we don’t care what you think. We’re all about serving investors; the people who buy this debt. And if you, the issuers, don’t like us, despite the fact that you pay us that’s your problem.
And under Brian Clarkson, the culture really began to change, where Moody’s really began to care about what the issuers thought and they began to care about what the issuers; their investment banking clients, in the case of mortgage-backed securities thought more than they did the investors who were buying these things at the end of the day.
LAMB: So today.
LAMB: Credit default swaps, derivatives, CDOs, all this; if you’re an investor today and you look out at the world, do you do you try to get a mortgage? Do you trust that? Do you I mean help us out here. I mean are we safer in any way? I mean
Frank Rich says we’re not.
MCLEAN: I don’t think we’re safer in any way. I have to agree with Frank Rich on that. Well, I think it’s two separate issues. With all these complex financial products, I don’t see why anybody in the world would want to own the stock of a financial company. There is just absolutely no way. If this crisis proved anything, it’s that nobody on the outside can tell what’s going on on the inside of these companies and that the balance sheets and financial statements of these companies may have absolutely nothing to do with reality. And I think that’s really scary for our for our system, so that’s one issue.
And then on the second issue, as a consumer, can you trust the financial products that people that people are selling you? Can you trust the people who are selling you these things to do the right thing? Well clearly the answer is no. And when you one of the most stunning moments to me in the book was these internal Washington Mutual presentations, showing how Washington Mutual tried to get customers who wanted, say 30-year fixed-rate mortgage to take out an option ARM instead, because Washington Mutual could turn around and sell that option ARM for a higher profit to Wall Street and it would be consumer saying well, but I like paying off my mortgage every month and these things are dangerous and the Washington Mutual person coming up with ways to ways to overcome those objections.
You know if it’s me, it’s all in the marketing and the honesty of the marketing. If you’re a real estate the person who is giving you a mortgage said to you you know what? I’m not working in your best interest. I’m going to try to get you to take the highest priced product I possibly can, because that’s where my self-interest lies and look out for yourself. You know I guess I’d be fine with it, but it’s the hypocrisy that people pretend to be your friend and to be doing this in your financial best interest and they’re and they’re not.
LAMB: Would what does this come from in your opinion? I mean we’re we like to think of ourselves as a country as doing good and we like to think of ourselves as being good people. And you start in Washington and go up the east coast and all you see is this kind of thing that we’ve been talking about.
LAMB: What happened?
MCLEAN: I don’t I don’t know. I obviously wasn’t around 40 years ago, so I don’t know if this mythology of America is mythology and if we were never really that way or if there’s some truth to it. I do think that, though, part of it is the story of modernization and globalization and that the bigger a society we live in, the less people feel personally accountable. And the less people feel personally accountable, the more the more leeway there often is there often is in the in their actions. And it’s why I think the corporate world has to be structured in a way that incentives are all. People will do what they’re paid to do and it and it I’m not sure that that incentive structure has changed.
LAMB: Looking back on your own career, the book on Enron, ”The Smartest Guys in the Room;” how did it sell, how well?
MCLEAN: I think it sold pretty well. It was a strange book in that it sold really well over time. So it I don’t think it was ever I don’t think it ever made the top ten on a bestseller list. I think maybe it did; I’m not sure. But it but it sold consistently from (INAUDIBLE)
LAMB: Would it be 50,000 copies or more than that?
MCLEAN: I think more than that. I’d have to ask my publisher.
LAMB: You’re working on an HBO movie, Too Big to Fail.
LAMB: Andrew Ross Sorkin’s bestseller.
LAMB: Are you did you find yourself in the middle and saying why aren’t why am I not representing my own book, because you’ve got these
MCLEAN: Yes, why am I
characters in your own book.
MCLEAN: I think I think I you know there’s always a little bit of ego involved in anything, right? Of course you could say at the end of the day, I wish it were I wish it were ”All the Devils Were Here,” but Andrew’s book is this cinematic, amazing play-by-play of the of the events on Wall Street as it unfolded and I think that’s an easier story to tell in film than the book we wrote is and his book was done when HBO wanted to make its movie and our book was not done. So it’s kind of hard to quibble when you don’t have a when you don’t have a manuscript to turn over to anyone and I think it’ll be a great film.
LAMB: And how do you how have you already worked on it?
MCLEAN: Yes. Yes, we’ve
LAMB: How do they use you in something like that?
MCLEAN: You really try as much as you can to I talked a bunch to the screenwriter about issues in the subprime lending industry, about characters; people that I got to know during the course of the book that I might have some insight into how they were being portrayed. For example, Hank Paulson figures pretty prominently in the in the movie, ”Too Big to Fail,” and Paulson’s also a fairly prominent character in our book, so I have you know some insight, hopefully, into how he works.
LAMB: What grade would you give Hank Paulson as a Secretary of the Treasury?
MCLEAN: You know I think that’s it’s a very tough question, because I think that I think that Paulson, in retrospect, it is very easy to poke holes in everything Paulson did. I do not believe that he ever operated in a way that he thought wasn’t in the best interest of the country. That doesn’t mean what he did was in the best interest of the country, but I firmly believe that he thought it was.
I also think that he stepped into a situation that was about ready to explode when he stepped in as Treasury Secretary and so to put the weight of the financial crisis on him because he became the most visible most visible force as it as it exploded, I think I think is unfair. I think you can ask questions about Paulson’s role at Goldman Sachs and why, when he felt so strongly about certain issues, he didn’t raise them more when he was the CEO of Wall Street’s most prestigious firm.
But to me, it’s difficult to it’s difficult to deeply criticize his actions as Treasury Secretary. To put it a different way, I’m not sure I would want to replay those events with a different person as Treasury Secretary. I’m not sure I wouldn’t, but I’m not sure I would.
LAMB: So given what we’ve talked about; the revolving door in Washington from the financial community to these important jobs in this town, who’s the best kind of person? Where should you get the person to run these organizations if not from the financial industry?
MCLEAN: I think it’s a really tough question. I think that I think that you want somebody who is both knowledgeable and an independent thinker and the second is very, very hard to find. Most people like to think like other people and there’s a sort of group thing mentality that takes over. And when you do meet skeptics, like some of the ones profiled in our book, they’re often a little bit out there.
Whistleblowers are often kind of weird figures. They’re not they’re not the sort of people who blend into a mainstream discussion, because they’re always saying wait; what about this and what about that? And I guess if I come away from this and the Enron story with one sort of pleading, it’s that to listen to listen to the skeptics and try to find people for those for those roles who have an ability to think independently.
LAMB: You’re married to the Enron prosecutor?
MCLEAN: Yes, I am.
LAMB: His name?
MCLEAN: Sean Berkowitz.
LAMB: And what have you learned about the business of prosecuting since you’ve been married to him?
MCLEAN: Well, my husband, after the leaving the government, went to a law firm where he where he does defense work now. So I it’s an interesting change in perspective, I guess. And I think I understand a lot more clearly the issues between ethical wrongdoing and criminal wrongdoing. And some of the some of the other the other side of the story that often, when you have a very unsympathetic character, doesn’t make its way into the into the public narrative. And I think I have more appreciation for the complexities of the law.
LAMB: Our guest, Bethany McLean; the book, ”All the Devils Are Here: The Hidden History of the Financial Crisis.” Thank you very much.
MCLEAN: Thank you.