25 People Who Deserve the Blame For The current Depression
25 People Who Deserve the Blame For The current Depression
- Angelo Mozilo
- The son of a butcher, Mozilo co-founded Countrywide in 1969 and built
it into the largest mortgage lender in the U.S. Countrywide wasn't
the first to offer exotic mortgages to borrowers with a questionable ability to
repay them. In its all-out embrace of such sales, however, it did legitimize the
notion that practically any adult could handle a big fat mortgage. In the
wake of the housing bust, which toppled Countrywide and IndyMac Bank (another company Mozilo started), the executive's lavish pay package was
criticized by many, including Congress. Mozilo left Countrywide last
summer after its rescue-sale to Bank of America. A few months
later, BofA said it would spend up to $8.7 billion to settle predatory
lending charges against Countrywide filed by 11 state attorneys general
- Phil Gramm
- As chairman of the Senate Banking Committee from 1995 through 2000, Gramm was Washington's most prominent and outspoken champion of financial deregulation.
He played a leading role in writing and pushing through Congress the
1999 repeal of the Depression-era Glass-Steagall Act, which separated
commercial banks from Wall Street. He also inserted a key provision into
the 2000 Commodity Futures Modernization Act that exempted
over-the-counter derivatives like credit-default swaps from regulation
by the Commodity Futures Trading Commission. Credit-default swaps took
down AIG, which has cost the U.S. $150 billion thus far.
- Alan Greenspan
- The Federal Reserve chairman — an economist and a disciple of
libertarian icon Ayn Rand — met his first major challenge in office by
preventing the 1987 stock-market crash from spiraling into something
much worse. Then, in the 1990s, he presided over a long economic and
financial-market boom and attained the status of Washington's resident
wizard. But the super-low interest rates Greenspan brought in the early
2000s and his long-standing disdain for regulation are now held up as
leading causes of the mortgage crisis. The maestro admitted in an
October congressional hearing that he had "made a mistake in presuming"
that financial firms could regulate themselves.
- Chris Cox
- The ex-SEC chief's blindness
to repeated allegations of fraud in the Madoff scandal is mind-blowing,
but it's really his lax enforcement that lands him on this list. Cox
says his agency lacked authority to limit the massive leveraging that
set up last year's financial collapse. In truth, the SEC had plenty of
power to go after big investment banks like Lehman Brothers and Merrill
Lynch for better disclosure, but it chose not to. Cox oversaw the
dwindling SEC staff and a sharp drop in action against some traders.
- American Consumers
- In the third quarter of 2008, Americans began saving more and spending less.
Hurrah! That only took 40 years to happen. We've been borrowing, borrowing,
borrowing — living off and believing in the wealth effect, first in
stocks, which ended badly, then in real estate, which has ended even worse.
Now we're out of bubbles. We have a lot less wealth — and a lot more effect.
Household debt in the U.S. — the money we owe as individuals — zoomed to
more than 130% of income in 2007, up from about 60% in 1982. We enjoyed
living beyond our means — no wonder we wanted to believe it would never end.
- Hank Paulson
- When Paulson left the top job at Goldman Sachs to become Treasury Secretary
in 2006, his big concern was whether he'd have an impact. He
ended up almost single-handedly running the country's economic policy for
the last year of the Bush Administration. Impact? You bet. Positive?
Not yet. The three main gripes against Paulson are that he was late to
the party in battling the financial crisis, letting Lehman Brothers
fail was a big mistake and the big bailout bill he pushed through
Congress has been a wasteful mess.
- Joe Cassano
- Before the financial-sector meltdown, few people had ever heard of
credit-default swaps (CDS). They are insurance contracts — or, if you
prefer, wagers — that a company will pay its debt. As a founding member
of AIG's financial-products unit, Cassano, who ran the group until he
stepped down in early 2008, knew them quite well. In good times, AIG's
massive CDS-issuance business minted money for the insurer's other
companies. But those same contracts turned out to be at the heart of
AIG's downfall and subsequent taxpayer rescue. So far, the U.S.
government has invested and lent $150 billion to keep AIG afloat.
- Ian McCarthy
- Homebuilders had plenty to do with the collapse of the housing market, not
just by building more homes than the country could stomach, but also by
pressuring people who couldn't really afford them to buy in. As CEO of
Beazer Homes since 1994, McCarthy has become something of a poster child
for the worst builder behaviors. An investigative series that ran in the
Charlotte Observer in 2007
highlighted Beazer's aggressive sales tactics, including lying about
borrowers' qualifications to help them get
loans. The FBI, Department of Housing and Urban Development and IRS are
all
investigating Beazer. The company has admitted that employees of its
mortgage unit violated regulations — like down-payment-assistance rules
—at least as far back as 2000. It is cooperating with federal
investigators.
- Frank Raines
- The mess that Fannie Mae has become
is the progeny of many parents:
Congress, which created Fannie in 1938 and loaded it down with
responsibilities; President Lyndon Johnson, who in
1968 pushed it halfway out the government nest and into a problematic
part-private, part-public role in an attempt to reduce the national
debt; and Jim Johnson, who
presided over Fannie's spectacular growth in the 1990s. But it was
Johnson's successor, Raines, who was at the helm when things really
went off course. A former Clinton Administration Budget Director, Raines
was
the first African-American CEO of a Fortune 500 company when he took the
helm in 1999. He left in 2004 with the company embroiled in an
accounting scandal just as it was beginning to make big investments in
subprime mortgage securities that would later sour. Last year Fannie and
rival Freddie Mac became wards of the state.
- Kathleen Corbet
- By slapping AAA seals of approval on large portions of even the riskiest
pools of loans, rating agencies helped lure investors into loading on
collateralized debt obligations (CDOs) that are now unsellable. Corbet
ran the largest agency, Standard & Poor's, during much of this
decade, though the other two major players, Moody's and Fitch, played by
similar rules. How could a ratings agency put its top-grade stamp on
such flimsy securities? A glaring conflict of interest is one
possibility: these outfits are paid for their ratings by the bond
issuer. As one S&P analyst wrote in an email, "[A bond] could be
structured by cows and we would rate it."
- Dick Fuld
- The Gorilla of Wall Street, as Fuld was known, steered Lehman
deep into the business of subprime mortgages, bankrolling lenders
across the country that were making convoluted loans to questionable
borrowers. Lehman even made its own subprime loans. The firm took all
those loans, whipped them into bonds and passed on to investors billions
of dollars of what is now toxic debt. For all this wealth destruction,
Fuld raked in nearly $500 million in compensation during his tenure as
CEO, which ended when Lehman did.
- Marion and Herb Sandler
- In the early 1980s, the Sandlers' World Savings Bank became the first to
sell a tricky home loan called the option ARM. And they pushed the
mortgage, which offered several ways to back-load your loan and thereby
reduce your early payments, with increasing zeal and misleading
advertisements over the next two decades. The couple pocketed $2.3
billion when they sold their bank to Wachovia in 2006. But losses on
World Savings' loan portfolio led to the implosion of Wachovia, which
was sold under duress late last year to Wells Fargo.
- Bill Clinton
- President Clinton's tenure was characterized by economic prosperity and
financial deregulation, which in many ways set the stage for the
excesses of recent years. Among his biggest strokes of free-wheeling
capitalism was the Gramm-Leach-Bliley Act, which repealed the
Glass-Steagall Act, a cornerstone of Depression-era regulation. He also
signed the Commodity Futures Modernization Act, which exempted
credit-default swaps from regulation. In 1995 Clinton loosened housing
rules by rewriting the Community Reinvestment Act, which put added
pressure on banks to lend in low-income neighborhoods. It is the subject
of heated political and scholarly debate whether any of these moves are
to blame for our troubles, but they certainly played a role in creating a permissive lending environment.
- George W. Bush
- From the start, Bush embraced a governing philosophy of deregulation.
That trickled down to federal oversight agencies, which in turn eased
off on banks and mortgage brokers. Bush did push early on for tighter
controls over Fannie Mae and Freddie Mac,
but he failed to move Congress. After the Enron scandal, Bush backed
and signed the aggressively regulatory Sarbanes-Oxley Act. But SEC head
William Donaldson tried to boost regulation of mutual and hedge funds,
he was blocked by Bush's advisers at the White House as well as other
powerful Republicans and quit. Plus, let's face it, the meltdown
happened on Bush's watch.
- Stan O'Neal
-
Merrill Lynch's celebrated CEO for nearly six years, ending in 2007,
he guided the firm from its familiar turf — fee businesses like asset
management — into the lucrative game of creating collateralized debt
obligations (CDOs),
which were largely made of subprime mortgage bonds. To provide a steady
supply of the bonds — the raw pork for his booming sausage business
—O'Neal allowed Merrill to load up on the bonds and keep them on its
books. By June 2006, Merrill had amassed $41 billion in subprime CDOs
and mortgage bonds, according to Fortune. As the subprime market unwound, Merrill went into crisis, and Bank of America swooped in to buy it.
- Wen Jiabao
-
Think of Wen as a proxy for the Chinese government —
particularly those
parts of it that have supplied the U.S. with an unprecedented amount of
credit over the past eight years. If cheap credit
was the crack cocaine of this financial crisis — and it was — then China
was one of its primary dealers. China is now the largest creditor to
the
U.S. government, holding an estimated $1.7 trillion in
dollar-denominated debt. That massive build-up in dollar holdings is
specifically linked to China's efforts to control the value of its
currency. China didn't want the renminbi to rise too rapidly against the
dollar, in part because a cheap currency kept its export sector humming
— which it did until U.S. demand cratered last fall.
-
When the chief economist at the National Association of Realtors,
an industry trade group, tells you the housing market is going to keep
on chugging forever, you listen with a grain of salt. But Lereah, who
held the position through early 2007, did more than issue rosy
forecasts. He regularly trumpeted the infallibility
of housing as an investment in interviews, on TV and in his 2005 book, Are
You Missing the Real Estate Boom?. Lereah says he grew concerned about the
direction of the market in 2006, but consider his January 2007 statement: "It appears we have established a bottom."
- John Devaney
-
Hedge funds played an important role in the shift to sloppy
mortgage lending. By buying up mortgage loans, Devaney and other
hedge-fund managers made it profitable for lenders to make questionable
loans and then sell them off. Hedge funds were more than willing to
swallow the risk in exchange for the promise of fat returns. Devaney
wasn't just a big buyer of mortgage bonds — he had his own $600 million
fund devoted to buying risky loans — he was one of its cheerleaders.
Worse, Devaney knew the loans he was funding were bad for consumers. In
early 2007, talking about option ARM mortgages, he told Money, "The consumer has to be an idiot to take on one of those loans, but it has been one of our best-performing investments."
- Bernie Madoff
-
His alleged Ponzi scheme
could inflict $50 billion in losses on society types, retirees and
nonprofits. The bigger cost for America comes from the
notion that Madoff pulled off the biggest financial fraud in
history right under the noses of regulators. Assuming it's all true, the
banks and hedge funds that neglected due diligence were stupid and paid
for
it, while the managers who fed him clients' money — the so-called
feeders — were reprehensibly greedy. But to reveal government and
industry regulators as grossly incompetent casts a shadow of doubt far
and wide, which crimps the free flow of investment capital. That will
make this
downturn harder on us all.
- Lew Ranieri
-
Meet the father of mortgage-backed bonds. In the late 1970s, the college
dropout and Salomon trader coined the term securitization
to name a tidy bit of financial alchemy in which home loans were
packaged together by Wall Street
firms and sold to institutional investors. In 1984 Ranieri boasted that
his mortgage-trading desk "made more money than all the rest of Wall
Street
combined." The good times rolled: as homeownership exploded in the early
'00s, the mortgage-bond business inflated Wall Street's bottom line. So
the
firms placed even bigger bets on these securities. But when subprime
borrowers started missing payments, the mortgage market stalled and bond
prices collapsed. Investment banks, overexposed to the toxic assets,
closed their doors. Investors lost fortunes.
- Burton Jablin
-
The programming czar at Scripps Networks, which owns HGTV and other lifestyle channels, helped inflate the real estate
bubble by teaching viewers how to extract value from their homes. Programs
like Designed to Sell, House Hunters and My House Is Worth What? developed loyal audiences, giving the housing game glamour and gusto. Jablin didn't act alone: shows like Flip That House (TLC) and Flip This House (A&E) also came on the scene. To Jablin's credit, HGTV, which airs in more than 97 million homes, also launched Income Property, a show that helps first-time homeowners reduce mortgage payments by finding ways to economically add rental units.
- Fred Goodwin
-
For years, the worst moniker you heard thrown at Goodwin, the
former boss of Royal Bank of Scotland (RBS), was "Fred the Shred," on
account of his knack for paring costs. A slew of acquisitions changed
that, and some RBS investors saw him as a megalomaniac. Commentators
have since suggested that Goodwin is simply "the world's worst banker."
Why so mean? The face of over-reaching bankers everywhere, Goodwin got
greedy. More than 20 takeovers helped him transform RBS into a world
beater after he assumed control in 2000. But he couldn't stop there. As
the gloom gathered in 2007, Goodwin couldn't resist leading a $100
billion takeover of Dutch rival ABN Amro, stretching RBS's capital
reserves to the limit. The result: the British government last fall
pumped $30 billion into the bank, which expects 2008 losses to be the
biggest in U.K. corporate history.
- Sandy Weill
-
Who decided banks had to be all things to all customers? Weill did. Starting
with a low-end lender in Baltimore, he cobbled together the first
great financial supermarket, Citigroup. Along the way, Weill's acquisitions (Smith Barney, Travelers, etc.) and persistent lobbying shattered
Glass-Steagall, the law that limited the investing risks banks could take.
Rivals followed Citi. The swollen banks are now one of the country's major
economic problems. Every major financial firm seems too big to fail, leading
the government to spend hundreds of billions of dollars to keep them afloat. The
biggest problem bank is Weill's Citigroup. The government has
already spent $45 billion trying to fix it.
- David Oddsson
-
In his two decades as
Iceland's Prime Minister and then as central-bank governor, Oddsson made
his tiny country an experiment in free-market economics by privatizing
three
main banks, floating the currency and fostering a golden age of
entrepreneurship. When the market turned ... whoops! Iceland's economy
is now a textbook case of macroeconomic meltdown. The three banks, which were massively leveraged, are in receivership, GDP could drop
10% this year, and the IMF has stepped in after the currency lost
more than half its value. Nice experiment.
- Jimmy Cayne
-
Plenty of CEOs screwed up on Wall Street. But none seemed more asleep at the switch than Bear Stearns'
Cayne. He left the office by helicopter for 3 ½-day golf weekends. He
was regularly out of town at bridge tournaments and reportedly smoked
pot. (Cayne denies the marijuana allegations.) Back at the office,
Cayne's charges bet the firm on risky home loans. Two of its highly
leveraged hedge funds collapsed in mid-2007. But that was only the
beginning. Bear held nearly $40 billion in mortgage bonds that were
essentially worthless. In early 2008 Bear was sold to JPMorgan for less
than the value of its office building. "I didn't stop it. I didn't rein
in the leverage," Cayne later told Fortune.
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