On September 8, 2008, Wall Street was embarking on a week from hell, and the U.S. was beginning its very public (and unfinished) journey into financial instability. During that fateful week three years ago, reports of Lehman Brothers’ demise were not greatly exaggerated, Merill Lynch was enjoying its last days of independence (it would be bought by Bank of America the following week), and Treasury Secretary Hank Paulson had just commandeered Fannie Mae and Freddie Mac. Americans would spend the next several months checking their dwindling 401ks and learning what the hell mortgage-backed securities, collateralized debt obligations and credit default swaps were.
We can’t tell you what renowned financial journalist Bethany McLean was doing the week of September 8, but we are quite sure that week lead to many long weeks for her; weeks spent uncovering how the U.S. financial system had made such a mess of itself. Along with her partner in uncovering pseudo-crimes, New York Times columnist and reporter Joe Nocera, McLean traced the origins of the 2008 Financial Crisis back 30 years. She and Nocera teamed up to write All the Devils are Here: The Hidden History of the Financial Crisis, which was released in November of 2010. In late August, the book was released in paperback — good news for those who enjoy reading about financial crises, but don’t have the money for hardcovers (perhaps because of financial crises). With the release of the paperback, and the current financial issues going on (debt ceiling, U.S. debt downgrade, unemployment, stagnant economy, European vacations getting cheaper for all the wrong reasons), we wanted to talk to McLean — who has called Chicago home since 2008 — about what the U.S. has learned, and what the U.S. has become, three years after September of 2008.
Man Up Chicago: Why should people pay attention to the economic issues that Europe is dealing with?
Bethany McLean: I think there are three reasons [Europe’s economic troubles] might hurt us. One is, if the EU falls apart, it is going to create economic uncertainty, and historically economic uncertainty leads to political conflagration. So, a Europe with the EU thrown into question is not good for any of us. Secondly, some 25-percent of the S&P’s earning comes from Europe, so if there is slow [economic] growth in Europe, or worse yet, a[n] [economic] crisis, that’s a problem for American companies. Thirdly, there is some argument that if this does become a European crisis and the European banks can no longer fund themselves, the Federal Reserve will have to step in as a lender of last resort in order to prevent a blowup in Europe. A global banking system means we are all connected and we can’t just let Europe go down.
MUCh: Rating agencies like Standard & Poors, Moody’s, and Fitch played a big role in the subprime mortgage crisis. You’ve written about the government’s reluctance to not rely so heavily on ratings agencies, even though the Dodd-Frank act allows government to not be dependent on them. Is there a chance that government will ever be able to ween itself from rating agencies?
BM: I think it’s really hard. There is so much ingrained resistance to it, from regulators to big investors. But [not relying on the ratings agencies] is a law in Dodd-Frank. So I think S&P’s action [of downgrading US debt] has lessened the chances the government will rewrite Dodd-Frank in favor of the ratings agencies. It might be the right outcome for the wrong reasons if that makes sense. In other words, I think the ratings agencies are bad and the reliance on them should be lessened, but I’m not sure it’s fair to punish S&P for downgrading the US.
BM: I think there is this whole wink-wink nod-nod going on where everyone in Washington is pandering to the public by saying, “We’re doing something about Fannie and Freddie,” but in reality nothing is getting done. And there’s a couple reasons why nothing is getting done. One is, if you shut down these entities, then you don’t have a housing market. People on Wall Street say the private market is just waiting to [be part of the housing market], but the government is squeezing out the private market. Most people I talk to say that just isn’t true and the private market isn’t waiting to step in. And then you have lobbying. There are a lot of people, including home builders and realtors who are invested in keeping [Fannie and Freddie around].
MUCh: Do extremely well-paid people on Wall Street lose incentives to do their job well since they basically make “Eff-You” money within a few years?
BM: It’s a huge problem. Things have changed so radically. Just 15 years ago, a [salary of a] million dollars a year used to be a fair amount of money on Wall Street. Now it’s just peanuts. The problem with that is, as you pointed out, once you have “Eff-You” money, do you really care if your firm goes down hill, even if you have more millions tied up in the firm? If you already have sums that most of us can only dream about, do you really care if additional sums are tied up in your firm?
To read part two of our interview with Bethany McLean, click the hyperlinked text.