Free Fallin’

A former treasurer reflects on the Great Recession

Back Q&A Jun 1, 2011 By Rich Ehisen

Former California State Treasurer Phil Angelides was tapped in 2009 to chair the Financial Crisis Inquiry Commission, a 10-member commission that Congress tasked with determining the causes of the Great Recession. After reviewing millions of pages of documents, interviewing more than 700 people and holding 19 days of hearings, the commission issued its findings in January. We sat down with Angelides in his Sacramento office recently to discuss those findings.

Comstock’s: The report details shocking systemic failures in our financial system. Even so, your findings were not unanimous. Why was that?
Obviously we all came in with a certain level of preconception, like most Americans. Everyone knew something about this crisis. But it was very much a journey of revelations. I came in thinking I had a pretty good grasp and knowledge of the financial system. But as we got into our inquiry, we were fascinated, surprised, shocked and appalled by what we saw and, for me personally, just the sheer level of gambling that was happening on Wall Street. I had, as I think many people do, this notion that Wall Street was there to serve the real economy and provide capital to grow businesses and jobs, and I found something quite different. Although our report was not unanimous — there were five Democrats and one Independent who signed onto the report, with two separate dissents by the Republicans — I can at least speak for the commission as a whole in that our conclusions are based in facts.

Comstock’s: You’ve stated that your job was not to be prosecutors, but to find out what was going on and to present the evidence and facts the way you saw them. Still, a lot of folks have questioned why we aren’t seeing the people responsible for this in jail.
This is the most frequently asked question I get. While we were not set up as prosecutors, we did have a legal obligation, given to us by Congress, that if we found potential violations of law, we were to refer that information to the attorney general of the U.S. and the appropriate state officials. We fulfilled those responsibilities. Obviously we’re not at liberty to talk about specific cases, but we did in fact forward material to the appropriate law enforcement authorities.

Comstock’s: Do you anticipate the Department of Justice prosecuting any of these cases?
It’s my hope that our investigation is viewed as a start, not an end, and the prosecutors follow up. I think there are two critically important issues here. One is that people need to know the justice system has only one set of rules, not one set for people of enormous wealth and power and another for everyone else. I think this notion of fairness is vitally important. But I think deterrence is also important. I’ve looked at a number of the civil settlements that have come out of this, where defendants have made tens of millions, or even billions of dollars, both individuals and firms. They settle for pennies on the dollar and admit no wrongdoing. Heck, if a guy robbed a 7-Eleven, stole $500 and the next day could settle for $25 and no admission of wrongdoing, he’ll be back doing it the next night. So I do think deterrence is a serious matter. As for cases being pursued, look at it this way. The full implosion of the crisis came at the end of 2008. In 2009, the country is still shaking and wobbling, and the real question is, “Are we going to plunge into a Great Depression?” It’s not until 2010 that the real investigations began. We’re still just learning each and every day about what happened here. So my hope is the investigation continues and cases are pursued.

Comstock’s: We saw a fairly strong resistance from some members of Congress against greater regulation of our financial system. In that regard, was Congress trying to kill the reforms that folks like you say are so desperately needed?
The House of Representatives sure tried. They and their political allies on Wall Street made a very deliberate effort to do it; there’s no question about it. In fact, very little has changed since our financial world came apart in 2008. Wall Street firms are still making an enormous amount of money through risky trading activities. There’s a greater concentration in power and assets in fewer banks than ever before. I mean, if “too big to fail” was a problem before, it’s an even bigger problem now. Bloomberg recently came out with some new numbers that showed that the biggest 10 banks control 77 percent of the banking assets in this country now. So if one of them gets in trouble, it’s hard to imagine the U.S. government won’t rescue them.

Comstock’s: You mentioned “too big to fail,” which we all heard as a rationale for the Troubled Asset Relief Program, the taxpayer dollars Washington used to prop up the financial system. A lot of people think TARP was just a bill of goods. Bottom line: Was the federal bailout necessary?
We tried to focus on a different question: How in the heck did it come to be that in fall of 2008 the only two choices this country appeared to have was either to allow the financial system to collapse or to inject it with trillions of dollars? I think that’s the question that’s central to this country. Based on every document I read, the witnesses I heard, the data I looked at, it’s pretty clear that when we got to September of 2008, the financial system was in free fall, and we had no alternative but to wade in and support the system. Now, it could have been done in different ways. It could have been done where we got much more in the way of change in behavior from these financial institutions for the price of assistance. I’ll give you one example: When the government came in and rescued Fannie Mae and Freddie Mac, they imposed a condition that they could no longer lobby Congress, given that they were now essentially a taxpayer-supported institution. But almost no constraints were put on the big banks. They got the cheap money with almost no strings attached. I think that was problematic.

Comstock’s: Could this happen again?
Yes. In the wake of Great Depression, we adopted reforms that did pretty well for us for several decades. But they came out of a period of great pain, and they also came out of a period where Wall Street itself was brought low. In this instance, because of the enormous support from the American taxpayer, Wall Street may have skipped a few beats for a few months but pretty soon they were back at it. Profits by 2009 were triple what they were in 2006, the year before the meltdown began, and compensation at big publicly traded firms hit a record high in 2010 of $135 billion. We’ve also seen the House try to cut funding to the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC’s budget is $1.2 billion, but the House GOP leadership tried to cut it to $1 billion. The SEC this year will bring in about $1.8 million in fines and fees, so it’s not about the budget. It was about constraining the ability of regulators, who are already outmatched by Wall Street, from doing their jobs. It’s the same with the CFTC, which is charged with the herculean task of regulating the over-the-counter derivatives market, which at one point was about $600 trillion in size and was without any regulation or transparency. The Dodd-Frank reform bill takes this dark market and brings it on the public exchanges. It’s going to be a very big task, but the House Republicans tried to cut their budget by a third, which would have made it impossible for them to do their work. So I definitely think the risk is there. In some respects the economy is so slow right now. It’s like a boat that’s not seaworthy. I’m afraid when this thing starts sailing again that we’ll be very prone to the same risks we saw in the run-up to the crisis. [Note: The SEC and CFTC have since received slight increases in their 2011 operating budgets.]

Comstock’s: What does this administration need to do to help prevent that from happening?
What the president needs to do is to more forcefully advocate the case for reform. He needs to lay out for the American people the risks that are still there and to really show the American people his commitment to making fundamental changes in the financial system. The opponents of reform have done an extraordinary job of confusing people about the facts. There is no question that by the time President Obama took office in 2008, the damage had been done and the economy was in free fall. But it does fall on him to make the case for reform, and I am hoping he does that in the next two years.

Comstock’s: You’ve mentioned that so many of the worst offenders have dodged their culpability in this situation. Did anyone step forward to be accountable?
Yes, Ben Bernanke. Most of the people we interviewed would not accept any correlation between the risks they took, the recklessness they engaged in and what happened to our economy. But I found Bernanke was one of the few people willing to be introspective and reflective. For example, he agreed with our assessment that the Federal Reserve’s unwillingness to control out-of-control mortgage lending was a total failure. But he also pointed out to us that the damage was so severe that by September of 2008, we were probably within a week or two of 12 of the 13 major financial institutions collapsing. So no one should ever forget how the system had come completely apart, and how the recklessness of Wall Street got us there. I hope those lessons are never forgotten.

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