Stories from 2008's Great Recession | 60 Minutes Full Episodes
Summary
TLDRThe video script delves into the 2008 financial crisis, focusing on the government's intervention in the banking sector. It discusses the Federal Deposit Insurance Corporation's (FDIC) role in seizing and managing failed banks, the impact of Lehman Brothers' bankruptcy, and the subsequent investigation by Anton Valukas. The script also explores the aftermath, including the FDIC's challenges, the government's decision to take an ownership stake in major banks, and the ongoing issues with mortgages and credit defaults. It highlights the concerns of investors and homeowners, the potential for further economic downturn, and the unpredictable future of the financial markets.
Takeaways
- 🏦 The Federal Deposit Insurance Corporation (FDIC) is responsible for handling unsound banks, often taking them over in secret to prevent panic among depositors.
- 🔍 The FDIC's operation 'Happy' was featured to show the process of seizing a failing bank, Heritage Community Bank, which had made ruinous bets on real estate.
- 📈 The number of bank failures is increasing, with 25 banks failing in the previous year and projections for more in the current year.
- 💵 The FDIC projected losses of 65 billion dollars over five years due to bank closures, which affects their ability to pay for bank failures.
- 👥 The FDIC team consists of various specialists, including accountants and asset specialists, who can effectively manage the transition of a seized bank.
- 🚫 The FDIC ensures that depositors do not lose any money, even in the event of a bank failure, up to the insured deposit limit of $250,000.
- 📊 The FDIC is funded by insurance premiums from banks, not taxpayer money, and is backed by the full faith and credit of the U.S. government.
- 📉 The failure of Lehman Brothers, the fourth-largest investment bank in the world, had a catastrophic impact on the global economy and led to a massive investigation.
- 🤔 There is evidence suggesting that Lehman Brothers and its accountants may have engaged in fraudulent activities, but no charges have been brought against them by the Securities and Exchange Commission (SEC).
- 🏢 The SEC's oversight of Lehman Brothers was extensive, with officials working inside the firm, raising questions about why problematic practices were not addressed sooner.
- 💼 Bank of America, under the leadership of Ken Lewis, avoided the pitfalls of subprime mortgages and grew to become one of the healthiest banks in the country.
Q & A
What is the role of the Federal Deposit Insurance Corporation (FDIC) in the banking system?
-The FDIC is a federal agency that insures deposits in banks, preventing depositors from losing their money in the event of a bank failure. It also takes over unsound banks, often seizing control of them to ensure a smooth transition and protection of depositors' funds.
How does the FDIC handle the seizure of a failing bank?
-The FDIC conducts the seizure of a failing bank discreetly, often at night, to prevent panic among depositors. They involve a team of specialists, including accountants and asset specialists, to manage the bank's operations and ensure that all deposits are accounted for and protected.
What was the situation with Citigroup and why were they repeatedly bailed out?
-Citigroup, like other large financial institutions, faced significant financial distress due to risky bets on real estate and other investments. The government repeatedly bailed out Citigroup to prevent its collapse, which could have had severe repercussions on the entire financial system.
How many banks failed in the year prior to the events described in the transcript, and what was the projection for the following year?
-25 banks failed in the year prior to the events described, and the FDIC expected the number to rise, with 16 already having failed in the current year.
What was the projected loss for the FDIC over the next five years due to bank closures?
-The FDIC projected a loss of 65 billion dollars over the next five years due to bank closures.
What happened to the employees of Heritage Community Bank after the FDIC seized it?
-After the FDIC seized Heritage Community Bank, the employees' pay stopped at 6 pm on the day of the seizure. Their unused vacation time would be paid for by the FDIC, and they essentially became employees of the FDIC at that point.
How does the FDIC ensure that customers' savings are safe after a bank failure?
-The FDIC ensures that customers' savings are safe by taking control of the bank's operations and assets. They also provide insurance coverage up to a certain limit ($250,000 at the time of the transcript), so depositors do not lose any money.
What is the process for the FDIC to find a buyer for a seized bank?
-The FDIC conducts a secret online auction to find a buyer for a seized bank. They receive bids from interested parties and choose the most suitable one to take over the bank's operations.
What was the outcome for the customers of Heritage Community Bank after it was seized by the FDIC?
-After Heritage Community Bank was seized, the FDIC found a buyer, MB Financial, which took over all of Heritage's branches, deposits, customers, and loans. This ensured a seamless transition for the customers and protected their savings.
What is the FDIC's stance on the size of financial institutions and the potential need for regulations?
-The FDIC's Chairman, Sheila Bear, suggested that Congress should consider limiting the size of banks to prevent institutions from becoming so large that their failure poses a systemic risk to the economy and requires taxpayer bailouts.
Outlines
🏦 FDIC Seizure of Unsound Banks
The Federal Deposit Insurance Corporation (FDIC) is stepping in to seize and manage failing banks to protect depositors' funds. The process, often conducted secretly to avoid panic, is highlighted through the operation 'Happy', where the FDIC takes over Heritage Community Bank. The bank's closure was kept secret from employees until the last moment to prevent a bank run. The FDIC's Sheila Bair discusses the increasing number of bank failures and the projected losses for the next five years. The FDIC team's diverse specialists ensure a smooth transition, and the bank's reopening assures customers that their deposits are safe.
📊 The Aftermath of Bank Takeovers
After the FDIC takes control of a failed bank, they manage the bank's website, inventory assets and liabilities, and prepare for business resumption. The FDIC, established in 1933, has never allowed an insured depositor to lose money, currently insuring up to $250,000 per depositor. The FDIC is funded by bank insurance premiums, not taxpayer money. Despite this, customers of the former Heritage Community Bank were initially uncertain about the safety of their funds. The FDIC often finds buyers for seized banks, in this case, MB Financial, which took over all deposits, customers, and loans, with the FDIC covering a significant portion of future loan losses.
🏛️ The Lehman Collapse and Its Impact
The bankruptcy of Lehman Brothers, the fourth-largest investment bank in the world, had catastrophic effects on the global economy. Anton Valukas was appointed to investigate the bankruptcy, resulting in a 2,200-page report that suggested top Lehman officials and Ernst & Young, the accounting firm, could face charges for misleading practices. The report detailed how Lehman hid billions in debt using an accounting trick called 'repo 105'. Despite evidence of fraud, no prosecutions have occurred, and Lehman's executives have largely avoided repercussions.
🕵️♂️ SEC's Role in the Financial Crisis
The Securities and Exchange Commission (SEC) is under scrutiny for its failure to act on evidence of Lehman Brothers' fraudulent activities. During Lehman's final months, SEC and Federal Reserve officials were embedded within the firm, aware of its precarious financial state but failing to disclose this to investors. The SEC's inaction and the government regulators' presence inside Lehman during its collapse complicate any potential prosecution. Critics argue that the SEC's failure to protect investors undermines its role as a regulatory body.
💼 Wall Street Executives and the Financial Crisis
Despite the financial crisis, many Wall Street executives have maintained their wealth and status. Former Lehman CEO Richard Fuld runs a consulting business and most of his senior colleagues have found new roles. In contrast, Matthew Lee, the Lehman accountant who raised concerns about the firm's accounting practices, is seeking employment. Critics argue that the complexity of Wall Street's financial instruments makes them incomprehensible to most, and that the government's recent investment in banks is a necessary step to stimulate lending and economic recovery.
💼 Bank of America's Expansion and Strategy
Bank of America, under CEO Ken Lewis, has grown significantly by acquiring leading companies in various banking sectors, such as Countrywide in mortgages and MBNA in credit cards. This strategy has turned it into a nearly three trillion-dollar conglomerate, often referred to as the Walmart of banking. The bank's总部位于Charlotte, North Carolina, and its growth has contributed to Charlotte becoming a financial powerhouse. Lewis believes that the era of excessive executive compensation is over, and he predicts a return to more regulated capitalism within three to five years.
🏘️ The Impact of the Mortgage Crisis on Housing and Foreclosures
The collapse of the housing bubble has led to a surge in foreclosures and a sharp decline in home prices. Miami-Dade County is particularly hard hit, with奥斯卡 Munoz's company experiencing a high demand for their services in clearing out foreclosed homes. The market is flooded with properties for sale, many of which are bank-owned or in distress. Real estate broker Peter Zalewski, who runs 'Condo Vultures Realty', sees opportunity amidst the downturn, as vultures clean up after the 'killing' in the market.
📉 The Commercial Real Estate and Credit Crisis
The crisis in the mortgage market was just the beginning, with commercial real estate, credit cards, and auto loans expected to follow suit. Investment fund manager Whitney Tilson predicts a second wave of mortgage resets with alta and option arm loans, which could lead to a significant number of defaults and further economic pain. The stock market is seen as forward-looking and currently presents bargain opportunities despite the anticipated bad news ahead.
📊 The Overhang of Housing Supply and Economic Outlook
The supply of housing units on the market has grown significantly, indicating that the economic difficulties are far from over. Sean Egan, who runs a credit rating firm, believes it will take several years to work through the oversupply in the housing market. He also warns of impending issues in other areas such as commercial real estate, credit cards, and auto loans. Despite the grim outlook, Tilson and Egan find value in the stock market, which they believe has already priced in the severity of the economic downturn.
Mindmap
Keywords
💡Bank Bailouts
💡Federal Deposit Insurance Corporation (FDIC)
💡Bank Failures
💡Real Estate Bets
💡Insured Deposits
💡Repo 105
💡Systemic Risk
💡Subprime Mortgages
💡Alt-A and Option ARM Loans
💡Foreclosure
💡Toxic Portfolios
Highlights
The FDIC is seizing several banks secretly at night to prevent panic.
Heritage Community Bank failed due to ruinous bets on real estate.
FDIC agents are specialists in accounting, asset management, and investigations.
FDIC's Sheila Bair discusses the increase in bank failures and the financial distress.
Heritage Community Bank held over 200 million dollars in 12,000 deposits.
The FDIC is prepared to lose 65 billion dollars on bank closures over the next five years.
Bank employees are often unaware of their bank's failing health.
FDIC takes control of bank websites and assures public of deposit safety.
The FDIC insures up to 250,000 dollars per depositor, funded by bank premiums, not taxpayer money.
Sheila Bair suggests Congress should limit the size of banks to prevent future bailouts.
Investor Whitney Tilson predicts a second wave of mortgage defaults from alt-a and option arm loans.
Tilson estimates over 70% of option arms will default.
The SEC had daily oversight of Lehman Brothers yet failed to act on questionable accounting practices.
Former SEC Inspector General David Kotz implies that the SEC's presence at Lehman Brothers complicates prosecution.
Bank of America's strategy of avoiding subprime mortgages has left it in a strong position.
Ken Lewis, CEO of Bank of America, believes the era of excessive financial service compensation is over.
Whitney Tilson sees the stock market as a bargain, despite upcoming financial challenges.
Transcripts
a lot of people are worried about their
Bank these days while devastated giants
like Citigroup get bailed out again and
again and again many smaller banks are
failing the federal agency that takes
over unsound Banks is the Federal
Deposit Insurance Corporation the same
people who guarantee that depositors
won't lose their money most every Friday
now the FDIC is seizing several Banks
you haven't seen these takeovers
happening because they're done secretly
at night to make sure that there's no
needless Panic by depositors but last
week we were given extraordinary access
to one of these operations because the
FDIC wants you to see what happens to
your money when your bank has failed
they're going to start at one branch
pull the cash out take it inside the
bank this is a team of FDIC agents
preparing to seize a bank outside
Chicago what we need to do is we need to
pull the corporate records they've
checked into this hotel under a
fictitious name CB and Associates to
prevent a run on the bank they don't
want anyone to know who they are or why
they're here you all know that this is
for the closing of Heritage Community
Bank Cheryl Bates and Arthur cook are in
charge of the operation that has been
given the code name happy strange
considering what they're about to do do
not discuss outside of this room what is
going on what we're here for they're
here to seize all five branches of
Heritage Community Bank a 40 year old
local bank providing savings student
loans mortgages and checking but like so
many others recently Heritage made
ruinous bets on real estate Sheila bear
is Chairman of the FDIC how many banks
failed last year 25. how many do you
expect to fail this year it's going up
there have been 16 already now and so
our loss projections are going up we're
having to increase premiums on banks to
address the loss projections going
forward it's a very distressed
environment right now I wonder if you
have a number in mind of how much the
FDIC is prepared to pay for bank
failures in 2009. well uh we have we
make a five-year projection uh that for
the next five years we had we projected
we'll lose 65 billion dollars on Bank
closings 65 billion some of that was
about to be spent on the imminent
failure of Heritage Community Bank it
held 12 000 deposits totaling more than
200 million dollars
the FDIC team waited for the last
customer to leave Cheryl Bates prepared
to go in what sorts of Specialists do
you have on this team
we have accountants we have asset
Specialists who specialize in loans we
have people who specialize in just the
physical facilities and we have a group
of investigators that come in and do a
review on the reasons for the bank
failure really your whole team could
come in and run the bank yes
four months ago the FDIC and state of
Illinois ordered the bank to stop risky
lending and raise cash but Heritage
couldn't find new investors the night of
February 27th no one at the bank knew
that the end was minutes away
the FDIC walked into all five branches
at once the chief executive John saphir
was told that the bank that was his
life's work was no longer his
we waited outside as they delivered the
news to the employees with Heritage Bank
your pay stopped at 6 pm
at 601 you went on a pay which was paid
by the FDIC unused vacation time you
will be paid for it you will not lose it
in that moment operation happy looked
pretty Grim correct because I would say
a large majority of the employees don't
know that the bank is in trouble and
that it's about to close we want it to
be as seamless as possible for your
depositors so no deposit or loses any
money at all and they reacted somewhat
with dismay and shock that we were there
and it's it it is a very trying
period for them so it is an end to that
whole chapter of their lives when we
walk in we are appeared to be the bad
guy I mean some of those people have
been there more than 20 years and those
are the ones who take it the hardest
because they feel that they have put
their life into it and now it's no
longer there make sure that no one comes
in without FDIC badges the employees now
work for the FDIC a public notice went
up and that was the signal to a team of
nearly 80 people to take over the bank
they took control of the bank website
and added a notice that all deposits
were safe
then they started an inventory of all
the assets and liabilities
what's happening right now we're getting
the bank personnel
assigned with their FDIC counterparts
the accounting people are meeting with
our accounting managers and then we have
an investigations group that comes in
and does a review of the bank they broke
the news to the media and prepared to
reopen the bank Saturday morning as
usual what do you expect from the
customers I think the customers will
some of them will come in with a sense
of of fear fear created the FDIC in 1933
after the Depression set off panics that
wiped out even healthy Banks we've been
around for 75 years nobody's ever lost a
penny of insured deposits no depositor
has ever lost a penny since the FDIC
went into business that's right I've
been sure deposits that's absolutely
right which is why you need to make sure
you below the insured deposit limits but
no no one's ever lost a penny and the
insured deposit limit is what right now
it's 250 000 that's the base limit when
the FDIC comes in and makes depositors
whole at a bank that has failed is that
tax money
no it is uh it is money from our
reserves which and we are funded by
insurance premiums that are assessed on
banks so no it is not taxpayer money
EIC chairman Sheila bear is a former
treasury official and professor of
Finance who's written children's books
on the wisdom of saving maybe some of
the CEOs on Wall Street should have read
the children's books maybe so
maybe so bear warned two years ago that
Bad Mortgages threatened the financial
system now she's managing the biggest
bank failures in years including the
collapse of Washington Mutual and last
Summer's sudden failure of IndyMac in
California
we were told we would get in yeah
when IndyMac failed you were watching
these scenes on television of people
lining up outside the bank like it was
1932. yes it was what did you think of
that I think people just forgot that
Banks do fail and how the FDIC Works
their money was safe it was safe it was
probably the safest place in the world
to have your money because we we were
operating the institution at that point
what sort of hit was that on your
balance sheet I think we ended up to uh
it was over nine billion dollars for a
33 billion yes it was very stiff the
question becomes
how many times can the FDIC do that at
what point is the FDIC broke the FDIC is
backed by the full faith and credit of
the United States government so if we
need to we try not to and don't want to
but if we need to we can borrow from
treasury to make up for any shortfall so
the FDIC never goes broke we do go grope
no we are the government we're back by
the Full Faith and Grant of the United
States government but customers at the
former Heritage Community Bank outside
Chicago weren't so sure about the safety
of their money on Saturday morning the
bank reopened on time and the FDI sees
Ricky McCullough stood at the front door
the people who were coming in this
morning what were they asking you
can I still write checks can I access my
safe deposit box can I use my ATM
machine and to all those questions you
answered what yes
customer bill Hess showed up on a
mission with an empty briefcase he
intended to leave with all of his money
we'd be glad to ask any questions for
you I don't care anymore he said I don't
care anymore and so I became a little
concerned so I came inside and one of
the things that he told me as he opened
up his briefcase he said well I don't
have a gun in here so I said well that's
good account McCullough explained to
Hess and his wife Audrey that their
savings were safe so if you have a
single account that's 250 if you have a
single account that's 250. so now that's
500. hess's briefcase was empty when he
came in
and empty when he came out we just
thought we were going to see closed and
the doors locked yeah you know so how do
you feel now that you've talked to them
it's fine
a shirt yeah a shirt yes for sure yes
yes you had confidence in the FBI cic
right yeah now if they can't pay you
then I won't have confidence in them
either
one customer did take most of her money
out but for many their concern was for
the bank employees
hope you all stay and I hope they don't
let anybody go we're fine you just keep
coming back to see us there are three
ways the FDIC takes over a bank
it can close it and pay off depositors
run the bank itself or more often it'll
try to find a buyer we do have bids from
five different parties a few days before
the Takeover of Heritage Community Bank
we were at the FDIC office in Dallas
where they were holding a Secret online
auction in hopes of finding a buyer for
Heritage I wanted to congratulate you
we've
chosen to accept one of your three bids
the winner was MB Financial a nine
billion dollar Chicago Bank the night of
the Takeover all of Heritage communities
branches became MB Banks Mitchell feiger
is mbceo it's almost as if nothing had
happened
uh almost nothing did happen uh it's
it's the same products it's the same
Services it's the same people taking
care of the same customers it was a
sweet deal for feiger the FDIC paid MB
Financial 3.5 million dollars MB got all
of the deposits customers and Loans if
some of those loans go bad in the future
the FDIC will pick up at least 80
percent of the losses we wondered what
Fieger thinks of the health of banking
today you have to believe that dozens
and dozens and dozens of more banks have
to fail
but it's okay
what do you mean it's okay it's okay
because I think the process is smooth
depositors are fully protected
by by an industry-funded FDIC insurance
um uh and I think that taking out the
weak players and taking some capacity
out of the industry is good it's good
for the industry it's good for the
survivors it will produce at the end a
much healthier banking system if you can
put Heritage Community Bank out of its
misery
why can't you do the same with Citigroup
first of all I don't talk about open
operating institutions we can only uh
deal with the resolution of a bank a
federally chartered or state chartered
depository institution and these very
large institutions that are creating the
headlines now these are really very
large Financial organizations so they
have it's more than a bank it's a broker
dealer it's offshore operations it's
foreign deposits we noticed that wild
giant Banks get bailed out investors in
failed Community Banks like Heritage get
wiped out Ben Bernanke the chairman of
the Federal Reserve says that the system
is unfair for smaller Banks and that's
just the way it is well I think that's
true and going forward I think we need
to really review the size of these
institutions and whether we should do
something about that bear surprised us
when she suggested that maybe the mega
Banks those bailed out by the taxpayers
shouldn't be allowed to exist in the
future I think that may be something a
Congress needs to think about actually
limit how big a bank can be yeah well
you know I think taxpayers rightfully
should ask
that if an institution has become so
large that there is no alternative
except for the taxpayers to provide
support
should we allow so many institutions to
exceed that kind of threshold the idea
would be that no bank would grow so
large that it posed a systemic risk to
the economy that'd be a very different
world it would be a different world
because Heritage Community Bank was
bought by MB Financial the FDIC didn't
have to pay depositors even accounts
over the insurance limit were safe for
Cheryl Bates it was her fourth closing
this year but certainly not her last
what do you want people to think when
you tell them you're from the FDIC
I always want them to think that I'm one
of the the good guys and that we want to
make sure that they get their money back
should their Bank fail that they are
going to be okay because the FDIC is
there
on September 15 2008 Lehman Brothers the
fourth largest Investment Bank in the
world declared bankruptcy sparking chaos
in the financial markets and nearly
Bringing Down the global economy
it was the largest bankruptcy in history
larger than General Motors Washington
Mutual Enron and Worldcom combined
the federal bankruptcy court appointed
Anton velucas a prominent Chicago lawyer
and former United States Attorney to
conduct an investigation to determine
what happened
included in the nine volume 2200 page
report was the finding that there was
enough evidence for a prosecutor to
bring a case against top Lehman
officials and one of the nation's top
accounting firms for misleading
government regulators and investors that
was two years ago and there have been no
prosecutions Anton velucas has never
given an interview about his report
until now
this is the largest bankruptcy in the
world what were the effects the effects
were the financial disaster that we are
living our way through right now and who
got hurt everybody got hurt the entire
economy has suffered from the fall of
Lehman Brothers so the whole world yes
the whole world
when Lehman Brothers collapsed 26 000
employees lost their jobs and millions
of investors lost all or almost all of
their money triggering a chain reaction
that produced the worst financial crisis
and economic downturn in 70 years
Anton velukas's job was to provide the
bankruptcy court with accurate reliable
information that the judges could use to
resolve the claims of creditors picking
over Lehman's corpse had you ever done
anything like this before I've never
done anything like Lehman Brothers and I
don't think anybody else has ever done
anything like Lehman Brothers so your
job I mean in some ways your job was to
assess blame our job is to determine
what actually happened put the card's
face up on the table and let everybody
see what the facts truly are velukas's
team spent a year and a half
interviewing hundreds of former
employees and pouring over 34 million
documents they told of how Lehman bought
up huge amounts of real estate that it
couldn't unload when the market went
South how it had borrowed 44 dollars for
every one it had in the bank to finance
the deals and how Lehman Executives
manipulated balance sheets and financial
reports when investors began losing
confidence and competitors closed in did
these quarterly reports represent to
investor is a fair accurate
picture of the company's Financial
condition in our opinion they did not I
mean isn't that against the law
certainly in our opinion was against
civil law if you will there were
colorable claims that this was a fraud
yes my colorable claims for Lucas means
there is sufficient evidence for the
justice department or the Securities and
Exchange Commission to bring charges
against top Lehman Executives including
CEO Richard fold for overseeing and
certifying misleading financial
statements and against Lehman's
accountant Ernst young for failing to
challenge Lehman's numbers they'd fudge
the numbers they would move what turned
out to be approximately 50 billion
dollars of assets from the United States
to the United Kingdom just before they
printed their financial statements in a
week or so after the financial
statements had been distributed to the
public that 50 billion dollars would
reappear here in the United States back
on the books in the United States in the
next financial statement they would move
it overseas again and file the report
and then move it back right it sounds
like a shell game it was a shell game it
was a gimmick Lehman misused an
accounting trick called repo 105 to
temporarily remove the 50 billion
dollars from its ledgers to make it look
as though it was reducing its dependency
on borrowed money and was drawing down
its debt Lehman never told investors or
Regulators about it this is really
deception to make the company look
healthier than it was yes deliberate yes
how are you so sure of that because we
read the emails in which we observed
people saying that they were doing it we
interviewed the witnesses who wrote
those emails or some of those emails and
asked them why they were doing it and
they told us they were doing it for
purposes of affecting the numbers do you
think limit Executives knew that this
was wrong for some of them certainly
there were concerns being expressed by
it at high levels about whether this is
appropriate what happens if the street
finds out about it so you know there was
a concern that there's a real question
about whether we can do this or whether
this was right or not one of those
people was Matthew Lee who had been a
senior executive at Lehman and the
accountant responsible for its Global
balance sheet Lee was one of the first
to raise objections inside Lehman about
the accounting trick known as repo 105.
it sounded like a rat poison repo 105
when I first heard it
um
so I investigated what it was and I
didn't like what I saw was there a point
in which you saw the accounting
principles employed by Lehman Brothers
change November 30th 2007 was the end of
our fiscal year
and I fully expected us you know to make
a loss that year like everyone else
and when I saw we made money it was a
record year in fact I thought that
doesn't sound right you knew the markets
were doing badly so why wasn't Lehman
doing badly and every time I found
something and I went to my boss or
whoever no response that was 10 months
before Lehman Brothers went bankrupt
Lee's position required him to sign off
on the accuracy of the firm's accounting
practices every quarter but in November
of 2007 he declined to do it by refusing
to sign it you were saying that you
didn't believe the numbers correct that
this wasn't a fair and accurate
representation of the financial
condition of Lehman Brothers right
something's up here why can't people
answer my questions you know why has
repo 105 doubled give me an answer
uh not you know nothing was said
Lee continued to press people for more
information but nothing changed in four
months before Lehman collapsed he sent
this letter to Lehman's top Executives
I've been telling you all year I've been
banging my head against the wall
I'm now putting in writing it says it
requires me to bring the attention to
management conduct and actions on the
part of the firm that I consider to be
possibly
unethical and unlawful yeah
what were you talking about specifically
well in that particular letter was
General there were so many specifics I
could have written laundry lists what
kind of a response did you get from this
letter it's like throwing a grenade I
wanted to wake somebody up at least to
address the topics it worked six days
after we sent that letter Matthew Lee
was downsized let go after 14 years but
Lehman Executives couldn't ignore the
letter and ask their accountants from
Ernst young to interview Matthew Lee and
in those interviews we have the notes
which are part of the report
he says very specifically 50 billion
dollars repo transactions moving money
off the balance sheet at quarter end so
our conclusion was Ernst young certainly
knew it as of that time
and did nothing with it the Lucas says
Ernst young was legally bound to make
sure that Lehman's audit committee and
its board of directors knew about Lee's
allegations of unethical and unlawful
accounting practices but they never did
did the audit committee know no did the
board of directors know no did Dick fold
know
did Dick vote though well he says no the
only place Lehman CEO Richard fold is
publicly answered questions about his
firm's bankruptcy has been in front of
Congress I have absolutely no
recollection whatsoever of hearing
anything about
or seeing documents related to repo 105
transactions while I was the CEO of
Lehman he said the same thing to me face
to face
do you believe him there was evidence
which would show that that's not
accurate the president of Lehman
Brothers told us that in fact he had
conversations with dick folt about this
and documents were shared with him which
would reflect the repo 105 transactions
and how they were being used Richard
fultz view on that was that he has no
knowledge of it you have other evidence
that he did a jury would have to decide
who's telling the truth but so far
there's been no jury to hear the
evidence
despite the Lucas's findings and the
supporting documents and testimony to
back them up the Securities and Exchange
Commission has not brought any charges
of any kind against former Lehman
executives
for the past few months we've made
numerous requests to interview the sec's
head of enforcement all of those
requests have been declined the
Securities and Exchange Commission is
not brought a case no they have not does
that bother you
I'm not permitted to be bothered by that
I'm you know my job was to set out the
facts lay it out they have to make their
own prosecutive decisions there is one
plausible explanation why the SEC hasn't
gone after top Lehman Executives as it
turns out some of Lehman's most
egregious accounting Shenanigans took
place right under the noses of
government Regulators how closely was
the SEC monitoring Lehman Brothers
during this time they were on premises
they were talking to the Lehman people
daily they officed there it was not
widely known at the time but during the
last six months of Lehman's existence
teams of officials from the SEC and the
Federal Reserve took up residence inside
the firm to monitor its precarious
financial situation they were inside the
building when Matthew Lee wrote his
letter to Lehman Executives alleging
unlawful accounting practices and they
were there when the practices took place
[Music]
valuca says the SEC also knew that
Lehman was being less than truthful when
it said that it had enough assets to
survive the crisis but that and other
damaging information was never disclosed
to investors who continued to pump
billions of dollars into the firm should
it have been disclosed absolutely isn't
the government the SEC in this case the
the people who were supposed to protect
the investors yes aren't they charged
with informing investors yes why didn't
they do it they may not have had the
expertise necessary to understand the
material they were receiving they were
getting the material whether they
understood it is another question the
very fact that government Regulators
were inside the company with access to
its books and Records would complicate
any prosecution of Lehman officials
until four months ago David kotz was the
sec's Inspector General over the
previous four years he'd issued more
than 100 reports about major
deficiencies in the way the SEC did its
job if the SEC knew about some of these
problems at Lehman Brothers and they
weren't disclosed
doesn't it make it difficult for the SEC
enforcement division to come back and
bring action against Lehman Brothers
they were there they saw it yeah I think
that that's definitely an impediment to
a potential case and certainly if you go
before a jury the defense lawyers can
make a big point about the fact that you
were there you knew about it why didn't
you do anything at the time now you're
coming after them in fact former Lehman
CEO Richard fold seemed to be trying out
that defense when he testified before
Congress in 2008. throughout 2008 the
SEC and the Federal Reserve conducted
regular and at times daily oversight of
our business and our balance sheet they
saw what we saw in real time let's just
assume for a moment that Anton velucas's
findings are true I mean isn't this just
a free ticket for executives to say well
look you know Lima did so and so and
nothing happened to them right no I
think absolutely that's a serious
problem I mean obviously there has been
a tremendous financial crisis the people
who engaged in proper behavior need to
be punished I think it's critical for
the SEC to go after not just companies
but also individuals where they have the
evidence to do so when Lehman's
bankruptcy was finally settled there
were claims against it for 370 billion
the creditors settled for about 20 cents
on the dollar
former CEO Richard fold now runs a
Consulting business in Manhattan he lost
most of his fortune and is embroiled in
a raft of litigation but is still a
wealthy man most of his senior
colleagues Ed Lehman have landed on
their feet
Ernst young Lehman's accounting firm is
now being sued by New York state for
aiding and abetting a fraud and Matthew
Lee the senior accountant who blew the
whistle at Lehman is still looking for
work unconvinced that much has changed
in the world of Finance over the last
four years you know the entrepreneurs of
Wall Street are continually getting more
and more sophisticated and they don't
necessarily want Regulators orders
Auditors to fully understand what
they're doing do you believe the balance
sheets of Big Wall Street firms if you
read them now these numbers are so big
and the financial instruments are so
complex that
you know nobody stands a chance really
of understanding I'd have more fun
investing in crap tables in Las Vegas
than
Wall Street firms
banks are supposed to lend money and
when they stop as they have in recent
months the workings of our entire
economy are threatened credit became so
Frozen the government had a step in this
past week and take an ownership stake in
the country's biggest banks on Monday
treasury secretary Henry Paulson
summoned the CEOs of the nine largest
banks to Washington and gave them a
massive amount of money so that they
would start lending again
the largest of the banks is Bank of
America now partly owned by the United
States of America
the head of Bank of America is Ken Lewis
he says when he and the others met at
the treasury Department it became clear
that secretary Paulson's offer was an
ultimatum no negotiation was allowed no
negotiations no so in other words take
it or take it right one of those it said
that he told the bankers and you this is
your patriotic Duty
I don't remember if he used the word but
but there was an element to that that
this was the right thing for the for the
American Financial system
and therefore it was the right thing for
America did you feel that was that a
persuasive line of absolutely I I deeply
believe that
I think he was right on now explained
why it was so important to the
government that everybody agreed that
the the nine largest banks are all in
this if you have a bank in that group
that really really needed the capital
you don't want to expose that bank in
other words stigmatize it so everybody
knows that they're not as good as
somebody else most of you were just
stunned by the amount of money that the
government put on the table yeah at
least I I was and I think most everybody
else was the total was 125 billion
dollars of taxpayers money Bank of
America Lewis says didn't need the money
but got 25 billion anyway do you have
any choice in this in other words can
you take the money and not lend we
wouldn't want to to do it that way
because you can make more money lending
and so it the intent will be to use it
to to grow loans and and to make more
net income but under the treasury plan
there's no requirement that a bank used
the money to lend it could use it to
acquire weaker competitors or put it in
treasury bills one of the few strings
Paulson attached relates to salaries a
bank would have to pay more taxes if it
paid an executive over five hundred
thousand dollars a year
one of the bankers in the meeting
objected and started arguing with
Paulson and that's when Ken Lewis a
Critic of excessive executive
compensation spoke up I did make the
point that we needed to stop talking
about executive cop and get on with this
because that should not stop the deal
actually you're quoted as saying if if
this is what's going to stop this you're
out of your mind I did use I did use the
phrase out of your mind because why
because you thought if it got out
publicly then know that the importance
of this deal getting done versus this
these elements of executive comp
just out of sync I mean this was so much
more important and all of us can can
take a little less money with his salary
and lucrative stock and options Lewis
took home 25 million dollars last year
but he's one of the few in the business
who can be fired without a golden
parachute and he thinks Executives on
Wall Street have made too much money I
think they were overpaid it's more
egregious in financial services than any
other industry that I know of we need to
cut back compensation in this industry
so this is a question everybody wants
answered
is this socialism have we now
sort of stepped taken a huge step away
from the kind of freewheeling capitalism
that we've known for the last 30 or so
years I don't know what we'll call it
but it will be different and there will
be more regulation the era of the golden
era of financial services is over in my
opinion but why isn't it socialism if
government starts owning
Banks and that will not last forever we
will we will pay off the preferred stock
at some point and come back to not being
owned partially by the government can
you give us what your sense of how long
it's going to take I think somewhere
between three and five years we'll pay
it off and then and then you go back to
uh
more toward capitalism it's said that
one of the main reasons the bank is
doing well is because of your decision
not to get into subprime mortgages
in uh in 2001 my first year as CEO
we decided that we just didn't like the
business it was it was too risky and so
we decided to get out of it he makes it
sound like a routine decision but
getting out of most of the financial
products that brought Wall Street
crashing down was significant and now
Lewis runs one of the country's
healthiest Banks which just keeps
growing we saw the strongest growth in
deposits in the third quarter we've ever
seen in our history he told us that
during this crisis people are taking
their money out of other Banks and
putting it in his we Bank every other
American family you know in America you
what we Bank every other American family
in the United States no yeah
half of the American families does
business with us in some form of fashion
you mean credit cards auto loans
deposits accounts checking half the
country
the way B of A accomplished this was by
buying the number one company in
virtually every category of banking for
instance it bought Countrywide and
mortgages and MBNA in credit cards now
it's a nearly three trillion dollar
conglomerate the Walmart of banking
this is the iconic image of Wall Street
600 Wheeler Dealers buying and selling
but this is B of A's trading floor and
it's 600 miles south of New York
the biggest bank in America is
headquartered in Charlotte some people
don't even know what state Charlotte's
in whether it's North or South Carolina
am I insulting you no in fact I always
say Charlotte North Carolina just so so
I don't have to ask a question
you have this building this building
that building that building then there's
one next to us that building not
surprisingly B of A seems to own
Charlotte and the town grew with the
bank
Hugh McCall was the bank's CEO before
Lewis it started out as a as a
relatively small Regional Bank well we
didn't like being small I mean there's
nothing really attractive about being
small
he set out to expand the bank's reach
from coast to coast and make Charlotte a
financial Powerhouse I think we have
this sort of Southern Underdog of
wanting to be masters of our own fate
and not be dependent on
Northern Capital when you were growing
and you'd go to New York did they not
treat you well is is that did they treat
you like sort of the country bumpkins
and I guess when I was a young man I
always felt a little uncomfortable in
New York this uncomfortable feeling that
they they weren't respecting you did you
have it in your head I'm going to
conquer New York
well that would overstate New York I was
more interested in America
did you really think that you could
overtake Wall Street
well have you ever played tennis once
you size up the competition and decide
whether you can beat him or not hey and
you thought you could I thought I could
and they did
the crowning Victory came last month
when wall Street's most famous
investment houses were collapsing under
the weight of their toxic portfolios and
needed rescuing they went had in hand to
Charlotte North Carolina
everybody thought you were going to buy
Lehman Brothers Friday night that was
the buzz Monday morning
it's not Layman Brothers It's Merrill
Lynch what happened between Friday night
and Monday morning I had talked to
secretary Paulson that that Friday and
basically said we didn't think we could
do the deal without government
assistance with Layman with Lehman that
we couldn't do it without some help
and then about 10 30 John thain called
it was Saturday morning September 13th
John thain the CEO of Merrill Lynch was
on the line Layman was on its death bed
Merrill Lynch was said to be next you
always wanted Merrill Edge we've always
thought that was the best you were
drooling for Maryland we have always
thought it was deals of this magnitude
take months of due diligence and vetting
this deal was thrown together over a
weekend with Bank of America spending 50
billion dollars to buy one of wall
Street's emblematic companies
but now B of A is exposed to Merrill
Lynch's poisonous Investments and
continuing losses the question is did
Ken Lewis pay too much some think that
we should have waited until Monday and
see if they would have gone bankrupt
you're saying that if you'd waited they
would they might have gone bankrupt some
think something we would have gotten it
for you know dirt cheap but my point is
you would have had a tarnished brand
you'd have had chaos you would have had
a Court ruling over all of the sale of
assets and that that it was worth it to
us to pay a more market price so that we
could not have that happen
so what about Merrell's 17 000 Brokers
Lewis has said their salaries are too
high is New York going to lose a lot of
jobs do you think I don't think a lot I
mean obviously we have to we we've got
seven billion dollars of call savings to
get and so that that means that there
will be jobs eliminated seven billion
seven billion dollars in Costa oh my God
so the government's rescue isn't helping
everyone on Wall Street what about Main
Street has the lending started did this
jump start lending again it should it's
only been a few days obviously and it
will make a big difference it will we're
sitting down with you Wednesday
the market is at this moment going down
again the Market's going down and what's
worrying me is the fact that we had
we've gotten the financial system in
much much better shape but the economy
is still a question mark and and we we
are in a recession by any standard other
than maybe some technical standard it
feels like a recession and we think it's
going to take some time before you know
it gets better Bank of America is the
largest mortgage lender in the country
so when do you think the housing
problems are going to bottom out our
best guess now is that the toward the
end of the first half of next year we'll
start to see signs either signs of the
bottoming or the actual bottoming what
about credit card debt is that going to
be the next shoe to drop it uh in some
ways already is because uh credit card
losses have have risen pretty
substantially
credit card debt and Auto Loan defaults
are part of why the bank's third quarter
earnings dropped nearly 70 percent Lewis
called the situation a damn disaster do
you think your job is secure
I've not it must I must think that
because I don't I don't think about that
question it doesn't matter your mind I
threw you a Zinger didn't I yeah yeah
did you defeat Wall Street
now to some degree we're part of it so I
don't I don't know that we defeated it
but well if you're number one right and
if the idea was to compete with New York
or Wall Street
um you won we have yes we have we have
one in that sense
when it comes to bailouts of American
Business Barney Frank and the Congress
may be just getting started nearly 2
trillion tax dollars have been shoveled
into the hole that Wall Street dug and
people wonder where's the bottom
it turns out the abyss is deeper than
most people think because there is a
second mortgage shock heading for the
economy in the executive suites of Wall
Street in Washington you're beginning to
hear alarm about a new wave of mortgages
with strange names that are about to
become all too familiar if you thought
sub-primes were insanely Reckless wait
till you hear what's coming
what's the future hold well this shows
one of the best guides to the danger
ahead is Whitney Tilson he's an
investment fund manager who's made such
a name for himself recently that these
investors who manage about 10 billion
dollars gathered to hear him last week
Tilson saw a year ago that subprime
mortgages were just the start we had the
greatest asset bubble in history and now
that bubble is bursting the single
biggest piece of the bubble is the U.S
mortgage market and we're probably about
halfway through the unwinding and
bursting of that bubble halfway it may
seem like all the Carnage out there we
must be almost finished but there's
still a lot of pain to come in terms of
write downs and losses that have yet to
be recognized in 2007 Tilson teamed up
with Amherst Securities an investment
firm that specializes in mortgages
Amherst had done some Financial
detective work analyzing the millions of
mortgages that were bundled into those
mortgage-backed Securities That Wall
Street was peddling it found that the
sub-primes loans to the least credit
worthy borrowers were defaulting but
Amherst also ran the numbers on what
were supposed to be higher quality
mortgages and they were frankly
terrifying as data we'd never seen
before and that's what made us realize
holy cow things are going to be much
worse than anyone anticipates the
trouble now is that the insanity didn't
end with the subprimes there were two
other kinds of exotic mortgages that
became popular called altas and option
arms the option arms in particular lured
borrowers in with ultra low initial
interest rates called teaser rates
sometimes as low as one percent but
after two three or five years those
rates reset they went up and so did the
monthly payment so a mortgage of say
eight hundred dollars a month could
easily jump to fifteen hundred dollars
now the alt a and option arm loans made
back in the Heyday are starting to reset
causing the mortgage payments to go up
and homeowners to default the defaults
right now are are incredibly high at
unprecedented levels and there's no
evidence that the default rate is
tapering off those defaults almost
inevitably are leading to foreclosures
and homes being auctioned and home
prices continuing to fall what you seem
to be saying is that there is a very
predictable Time Bomb effect here
exactly I mean you can look back at what
was written in o5 and 07 you can look at
the reset dates you can look at the
current default rates and it's really
very clear and predictable what's going
to happen here just look at this
projection from the Investment Bank of
Credit Suisse these are the billions of
dollars in subprime mortgages that reset
last year and this year now look at what
hasn't hit yet the alt a and option arm
resets when homeowners will pay higher
interest rates in the next three years
we're at the beginning of a second wave
how big is the potential damage from the
old days compared to what we just saw in
the subprimes well the subprime was
approaching a trillion the Alta is about
a trillion and then you have option arms
on top of that that's probably another
five to six hundred billion on top of
that how many of these option arms would
you imagine are going to fail well north
of 50 percent my gut would be 70 percent
of these option arms will default how do
you know that we know it based on
current default rates and this is before
the reset so people are defaulting even
on the the little three percent teaser
interest only rates they're being asked
to pay today
that second wave is coming ashore at a
place you might call the repo Riviera
Miami-Dade County
Oscar Munoz used to sell real estate now
his company clears out foreclosed homes
the business is just going through the
roof for us fortunately for us
unfortunately for the poor families who
are going through this I wonder do you
ever come to houses where the people are
still here absolutely that's really a
sad situation I'd rather not meet the
people why not it's not easy to to come
in and move a family out
it's it's just our job to do it for the
bank it's it's just the nature of of
what's going on in the market right now
what is going on in the market right now
how much work are you getting every day
we have 20 30 assignments a day a day
just your company just our company and
we're one of the few companies right now
we're hiring we hire we have to hire
people because the demand is is so high
people who've been evicted tend to leave
stuff behind the next house is usually
much smaller Banks hire Munoz to move
the possessions out where by law they
remain for 24 hours often the neighbors
pick through the remains once the homes
are empty the hard part starts trying to
find buyers in a free fall market Miami
real estate broker Peter zalewski talks
like a man with a lot of real estate to
move we have a hundred and ten thousand
properties for sale in South Florida
Today 55 000 foreclosures nineteen
thousand bank owned properties 68 of the
available inventories in some form of
distress they need someone to clean it
up what's the name of your company it's
called condo vultures Realty what does
that mean that in times of distress in
times of uh downturn there's opportunity
and you know vultures are clean up the
mess a lot of people seem to think they
kill but they don't actually kill they
clean the killing in Miami was done by
the developers back when it seemed that
the party would never end they sold
hyper-inflated condos at what amounted
to real estate orgies sales parties for
invited guests who were armed with
option arm and all day loans there were
red ropes out outside they had hired
cameramen and they had hired
photographers to almost set the scene of
a Paparazzi they were hiring fake
Paparazzi to make the customers feel
like they were special you were selling
a lifestyle what role did these exotic
mortgages play these alt A's and the
option arms they were essential they
were necessary without the Altair option
our mortgage this boom never would have
occurred it never would have occurred
because without the altez and the option
arms many buyers never would have
qualified for a loan the banks and the
Brokers were getting their money up
front in fees so the more they wrote the
more they made they stopped checking
whether the income was even real they
turned to low and no doc loans so-called
Liars loans and jokingly referred to as
ninja loans no income no job no assets
and they were still willing to lend but
help me out here how does that make
sense for the lender it would seem to be
reckless in the extreme it was but the
key assumption underlying the
willingness to do this was that home
prices would keep going up forever and
in fact home prices Nationwide had never
declined since the Great Depression on
the way up everyone wanted in no one
expected to feel any pain people like
acupuncturist Rula geosmus became real
estate speculators how many properties
did you buy in this last five year
period I believe in the last five year
period I bought about six properties and
what did you buy them for for
Investments she says she put 20 percent
down on each now they're all financed
with option armed loans what did you
understand about the loans well
unfortunately I didn't ask too many
questions I mean in the old days I would
shop around but because of the frenzy
and I was so busy looking to buy other
properties I didn't really focus on
shopping around for mortgage brokers but
if you're investing in real estate
you're buying multiple properties you
should be asking a lot of questions yeah
why didn't you ask I was busy I was
really busy looking at property all the
time all day long did you read the
paperwork no I didn't now she's losing
money on every property you know that
there are people watching this interview
who are saying you know she was just
foolish
she was greedy and foolish she was
buying small apartment buildings and
wasn't paying enough attention to how
they were financed my full-time job is
on my acupuncturist so this is just a
side thing you're an acupuncturist but
you got stuck in real estate yeah
geosmith says she was misled and she
hopes to renegotiate her loans but many
other buyers have simply walked away
from their properties this Miami luxury
building was a sellout but when we
visited a quarter of the condos were in
foreclosure what did this place go for
this was originally purchased in October
of 2006 for 2.4 million dollars 2.4
million what's it worth now uh the
asking price from the lender is 939 so
it lost a million and a half dollars in
value in a couple of years since the top
two years
and there are tough years to come
because just like the subprimes the alt
a and option arm mortgages were bundled
into Wall Street Securities and sold to
investors in a nutshell 2009 looks like
what to you miserable 2010. minutes are
even worse
Sean Egan runs a credit rating firm that
analyzes corporate debt Fortune Magazine
cited Egan as one of six Wall Street
Pros who predicted the fall of the
financial Giants this next wave of
defaults which everyone agrees is
inevitably going to happen how Central
is that to what happens to the rest of
the economy
core it's core because housing is such
an important part
we're not going to get the Housing
Industry back on track until we clear
out this garbage that's in there that
hasn't cleared out yet in fact we
haven't seen the bottom it's getting
worse what do you think there are some
statistics from the National Association
of Realtors and they track the the
supply of housing units on the market
and that's grown from 2.2 million units
about three years ago up to 4.5 million
units earlier this year so you have you
have the massive Supply out there of of
units that need to be sold well with the
housing Supply increasing that much what
does it mean it means that this problem
the economic difficulties are not going
to be resolved in a short period of time
it's not going to take six months it's
not going to take 12 months we're
looking at probably about three four or
five years before this over
the supply overhang is worked through in
the next four years eight million
American families are expected to lose
their homes but even after the
residential meltdown Whitney Tilson says
blows to the financial system will keep
coming the same craziness that occurred
in the mortgage Market occurred in the
commercial real estate markets and
that's taking a little longer to to show
but but they're going to be big losses
there credit cards auto loans you name
it so we're maybe halfway through the
mortgage bubble but we may only be in
the third inning of the overall bursting
of this asset bubble does that mean that
the stock market is going to continue
plunging as we've seen the last several
months actually we're the most bullish
we've been in 10 years of managing money
and the reason is is because the stock
market for the first time I can say this
in years has finally figured out how bad
things are going to be and the stock
market is forward-looking and with U.S
stocks down nearly 50 percent from their
highs we're actually finding Bargains
Galore we think Corporate America is on
sale
the stock market will still have a lot
of figuring to do with more troubling
news on the horizon The Mortgage Bankers
Association says one out of 10 Americans
is now behind on their mortgage that's
the most since they started keeping
records in 1979.
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