A Fighting Chance

But it was the real “could haves” that tore at me. We could have fixed our roads and bridges and public transportation. We could have launched universal preschool and made state universities affordable again. We could have doubled our federal investments in medical research and scientific research for the next twenty years.

The responsibility for exercising oversight on how the Treasury Department spent all that money weighed heavily on me, even if we weren’t expected to do anything besides write reports.

Over and over, Congress had declared that there was no money for bridges or preschool or more medical research, but now the American taxpayer was on the hook for a $700 billion bank bailout. How did that happen? Yes, TARP was designed as an investment and Treasury would work to get the money back, but infrastructure, education, and research are investments, too—investments that deliver enormous economic payoffs but are shamefully underfunded.

The mortgage crisis—when millions of families suddenly couldn’t pay their mortgage—was only the first layer of the problem. There was a second layer, one that elevated “shock” to “crisis.”

With so much money to be made selling the jazzy new mortgages, Boring Bankers gave way to Hotdog Wall Street Traders. As Washington increasingly deregulated the banking industry—starting in the 1980s and picking up steam in the 1990s—the big banks were on the lookout for new investment opportunities that had previously been closed off to them. Over time, a lot of them decided they could make more money if they resold their mortgages on Wall Street instead of holding on to them as borrowers paid them back over the years. At first, reselling the mortgages brought in more cash, which made it easier for more people to get loans and made our housing system work better. But as the big banks figured out that they could make a lot more money on the jazzy new mortgages, they started buying and selling packages of very-high-profit, very-high-risk products. Many of the big banks quickly became more like the speculators and house flippers who were buying these houses—out to make a quick buck.

The traders soon figured that if they could make a little money bundling and trading a few mortgages, then why not make a mountain of money selling a mountain of mortgages? Soon the mortgages were bundled into giant packages, and then the bundles were sold and resold, repackaged and resliced. As time went on, the deals and the packages got more and more complicated.

Eventually, these bundles of mortgages were sold everywhere, and many were like time bombs just ticking down to the moment they would explode.

Nobody sold packages labeled “Warning: Grenades Inside!” Instead, those packages were all graded for risk, with AAA, BBB, and so on. The problem was that the grading was done by private rating agencies that got paid by the bundlers for those grades and, incidentally, were also trying to sell the banks millions of dollars of other services. The federal regulators could have supervised these rating agencies, but “deregulation” was the mantra of the day, so they looked the other way, leaving the rating agencies free to make up their own standards. Surprise, surprise—the private rating agencies gave most mortgage bundles AAA ratings.

Brokers used those AAA ratings and sold the “safe” bundles to investors everywhere. Pension funds invested in them. So did city governments, insurance companies, nonprofit charities—you name it, if a company or an organization was big enough to attract Wall Street’s attention, it probably owned some “AAA-rated mortgage-backed securities.”

When the housing bubble popped and families couldn’t make their mortgage payments, the bombs started going off. The effect was entirely predictable—a catastrophic meltdown.

The financial giants stumbled and started to fall. First Bear Stearns, then Lehman Brothers and Merrill Lynch. It looked like the whole financial system might crumble to nothing.

In the fall of 2008, the banking system went into lockdown mode. Large and small businesses struggled to get credit, which meant that many companies couldn’t buy inventory or even make payroll. Home buyers struggled to get mortgages. Car buyers struggled to get car loans. It was as if someone had thrown truckloads of sand into the giant gears that drove the entire economy.