-
[CLOCK TICKING]
-
>> 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 & 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 Bair is
chairman of the FDIC.
-
How many banks
failed last year?
-
>> Twenty five.
-
>> How many do you expect
to fail this year?
-
>> It's going
up. There have
-
been 16 already now,
-
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, we make
-
a five-year
projection that for
-
the next five years
we project that
-
we'll lose $65 billion
on bank closings.
-
>> Sixty-five billion?
-
>> Sixty-five 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.
-
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 in State of
-
Illinois ordered
the bank to
-
stop risky lending
and raise cash,
-
but Heritage couldn't
find new investors.
-
The night of February 27,
-
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 Safir 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 6:00 PM.
-
At 6:01, you
went on a pay,
-
which is 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 depositor loses
any money at all.
-
And they reacted somewhat
-
with dismay and shock
that we were there.
-
And 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 appear to
be the bad guys.
-
>> 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
-
some of them will come
-
in with a sense 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. Of
insured deposits.
-
That's absolutely right,
-
which is why you need to
-
make sure you blow
-
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 money
from our reserves,
-
and we are funded by
insurance premiums
-
that are assessed
on banks.
-
So no, it is not
taxpayer money.
-
>> FDIC chairman
Sheila Bair 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.
-
[LAUGHTER]
-
>> Bair warned
two years ago
-
that bad mortgages
-
threaten 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.
-
>> They open
the next hour.
-
>> 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 probably
-
the safest place in
the world to have
-
your money because
we were operating
-
institution at that point.
-
>> What hip was that
on your balance sheet?
-
>> It was over $9
billion for $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.
-
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 don't go broke.
-
No, we are the government.
-
We're backed by
the full faith and
-
credit 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.
-
>> Morning.
-
>> And the FDIC's
-
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.
-
>> McCullough explained
to Hess and his wife,
-
Audrey, that their
savings were safe.
-
>> So if you have
a single account,
-
that's $250,00. So now
that's fine, Audrey.
-
>> 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.
-
>> So how do you feel
-
now that you've
talked to them?
-
>> It's fine.
-
>> Assured.
-
>> You feel assured?
-
>> Yes.
-
>> You had confidence
in the FDIC.
-
>> Yeah. Now, if
they can't pay you,
-
then I won't have
confidence in them, either.
-
[LAUGHTER]
-
>> One customer did
-
take most of
her money out,
-
but for many,
their concern
-
was for the
bank employees.
-
>> I hope you all
stay and I hope
-
they don't let anybody go.
-
>> We're fine.
-
>> Good.
-
>> Do 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 billion dollar
Chicago bank.
-
The night of the takeover,
-
all of Heritage
Community's branches
-
became MB banks.
-
Mitchell Feiger
is MBs CEO.
-
It's almost as if
nothing had happened.
-
>> Almost nothing
did happen.
-
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.
-
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%
of the losses.
-
We wondered what
Feiger 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 an industry funded
FDIC insurance.
-
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 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 it's more than a bank.
-
It's a broker dealer.
-
It's offshore operations.
-
It's foreign deposits.
-
>> We noticed that while
-
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.
-
>> Bair 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.
-
>> No, I think that may be
-
something Congress
needs to think about.
-
>> Actually limit how
big a bank can be?
-
>> Well, I think taxpayers
rightfully should
-
ask that if an institution
-
has become so large,
-
there is no
alternative except for
-
the taxpayers to
provide support,
-
should we allow so
many institutions
-
to exceed that threshold?
-
>> And the idea
would be that
-
no bank would grow so
-
large that it posed
-
a system 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 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 Valukas,
-
a prominent
Chicago lawyer and
-
former United
States attorney to
-
conduct an investigation
-
to determine
what happened.
-
Included in the
nine volume
-
2,200 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 Valukas
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 Valukas'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 in some ways,
-
your job was to
assess blame?
-
>> Our job is to
-
determine what
actually happened.
-
Put the cards face
up on the table,
-
and let everybody see what
-
the facts truly are.
-
>> Valukas'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 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
investors a fair,
-
accurate picture of the
-
company's financial
condition?
-
>> In our opinion,
they did not.
-
>> Isn't that
against the law?
-
>> It certainly,
in our opinion,
-
was against civil
law, if you will.
-
There were colorable
claims that
-
this was a fraud, yes.
-
>> By colorable claims,
-
Valukas 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 Fuld,
-
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 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 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
-
their report and
then move it back.
-
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
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 about 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
Lehman executives
-
knew that this was wrong?
-
>> For some of
them, certainly.
-
There were concerns
being expressed
-
at high levels about
-
whether this is
appropriate,
-
what happens if the street
-
finds out about it.
-
So there was a concern
-
that there's a
real question
-
about whether
we can do this,
-
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.
-
>> Sounded like
a rat poison,
-
Repo 105 when I
first heard it.
-
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 30, 2007
-
was the end of
our fiscal year,
-
and I fully
expected us 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.
-
>> Something is up
here. Why can't
-
people answer
my questions?
-
Why has Repo 105 doubled?
-
Give me an answer.
Nothing was said.
-
>> Lee continued to
press people for
-
more information,
but nothing changed.
-
And 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
it in writing.
-
>> 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, I was general.
-
There were so many
specifics I could
-
have written laundry list.
-
>> What response did
-
you get from this letter?
-
>> It was like
throwing a grenade.
-
I wanted to wake
somebody up,
-
at least to address
the topics.
-
>> It worked. Six days
-
after he sent that letter,
-
Matthew Lee was downsized,
-
let go after 14 years.
-
But Lehman
executives couldn't
-
ignore the
letter and asked
-
their accountants
from Ernst and
-
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 repo
transactions
-
moving money off the
balance sheet in
-
quarter end, so our
conclusion was Ernst and
-
Young certainly
knew it as of
-
that time and did
nothing with it.
-
>> Valuka says Ernst and
-
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 Fuld know?
-
>> Did Dick Fuld know?
Well, he says no.
-
>> The only place
Lehman's CEO
-
Richard Fuld's publicly
answered questions
-
about his firm's
bankruptcy
-
has been in front
of Congress.
-
>> I have absolutely
no recollection
-
whatsoever of
hearing anything
-
about we're 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
-
showed that that's
not accurate.
-
The president of
Lehman Brothers
-
told us that, in fact,
-
he had conversations
with Dick Fuld
-
about this and documents
-
were shared with him,
-
which would reflect the
Repo 105 transactions
-
and how they
were being used.
-
Richard Fuld's
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 Valukas'
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 made numerous
requests to
-
interview the SEC's
head of enforcement.
-
All of those requests
have been declined.
-
>> The Securities
and Exchange
-
Commission has not
brought a case?
-
>> No, they have not.
-
>> Does that bother you?
-
>> I'm not permitted to
be bothered by that.
-
>> 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.
-
Valuka 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 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 Cots was the SEC's
Inspector General.
-
Over the previous
four years,
-
he 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
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 Fuld
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 Valukas'
findings are true.
-
Isn't this just
a free ticket
-
for executives to say,
-
well, look, Lehman
-
did so and so and nothing
happened to them.
-
>> No, I think,
absolutely,
-
that's a serious problem.
-
Obviously, there has
-
been a tremendous
financial crisis.
-
The people who engaged
-
improper 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 $0.20 on the dollar.
-
>> Former CEO
Richard Fuld 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 at
-
Lehman have landed
on their feet.
-
Ernst and Young, Lehman's
-
accounting firm
is now being
-
sued by New York State for
-
aiding and
abetting of 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.
-
>> The entrepreneurs
of Wall Street are
-
continually getting more
-
and more sophisticated,
-
and they don't necessarily
want regulators
-
or 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 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 to 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 there was an
element to that,
-
that this was
the right thing
-
for the American
financial system,
-
and therefore, it was
-
the right thing
for America.
-
>> Did you feel that?
-
Was that a
persuasive line?
-
>> Absolutely. I
deeply believe
-
that. I think he
was right on.
-
>> Now, explain why it was
-
so important to the
government that
-
everybody agree that
-
the nine largest banks
are all in this.
-
>> If you have a bank in
-
that group that 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 was,
-
and I think most
everybody else was.
-
>> The total was
$125 billion
-
of taxpayers' money.
-
Bank of America,
Louis 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 do it
-
that way because you can
-
make more money lending.
-
And so the intent
will be to use it
-
to grow loans and to
make more net income.
-
>> But under the
treasury plan,
-
there's no
requirement that
-
a bank use 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
$500,000 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 comp and
get on with this
-
because that should
not stop the deal.
-
>> Actually, you're
quoted as saying,
-
if this is what's
going to stop this,
-
you're out of your mind.
-
>> I did use the phrase
out of your mind.
-
>> Because what?
Because you thought if
-
it got out publicly.
-
>> Know that the
importance of
-
this deal getting
done versus
-
these elements of
executive comp
-
were just out of sync.
-
This was so much
more important,
-
and all of us can take
a little less money.
-
>> With his salary and
-
lucrative stock
and options,
-
Louis took home $25
million 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 stepped
taken a huge step
-
away from the free
will and 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 golden era of
-
financial services is
over, in my opinion.
-
>> But why isn't
it socialism,
-
if the government starts
owning our banks.
-
>> That will not
last forever.
-
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 your sense
-
of how long it's
going to take?
-
>> Yeah, I think
somewhere 3-5 years,
-
we'll pay it off.
-
And then you go back to
-
um 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 2001, my
first year as CEO,
-
we decided that we
-
just didn't like
the business.
-
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 Louis 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 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 or fashion.
-
>> You mean credit
cards, auto loans,
-
deposit accounts.
Half the country.
-
The way BOA accomplished
this was by buying
-
the number one company in
-
virtually every
category of banking.
-
For instance, it
bought countrywide in
-
mortgages and MBNA
in credit cards.
-
Now it's a nearly $3
trillion 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
-
I don't have to
ask a question.
-
>> You have this
building, this building.
-
>> That building.
-
>> That building.
And 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 McColl was the
bank's CEO before Louis.
-
Now, it started out as
-
a relatively small
regional bank.
-
>> Well, we didn't
like being small.
-
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 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?
-
Did they treat you like
the country bumpkins?
-
>> I guess when I
was a young man,
-
I always felt a little
-
uncomfortable in New York.
-
>> This uncomfortable
feeling that
-
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 hat in
-
hand to Charlotte,
North Carolina.
-
Everybody thought
you were going
-
ti buy Lehman Brothers.
-
Friday night, that
was the buzz.
-
Monday morning.
-
[LAUGHTER]
-
>> It's not
Lehman Brothers,
-
it's Merrill Lynch.
-
What happened between
-
Friday night and
Monday morning?
-
>> I had talked to
Secretary Paulson
-
that Friday and
basically said,
-
we didn't think we could
-
do the deal without
government assistance.
-
>> With Lehman.
-
>> With Lehman, 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.
-
Lehman was on
its deathbed.
-
Merrill Lynch was
said to be next.
-
You always wanted
Merrill Lynch.
-
>> We always thought
that was the best.
-
>> You were drooling
for Merrill Lynch?
-
>> 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 to buy
-
one of Wall Street's
emblematic companies.
-
But now Biava
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 might have
gone bankrupt.
-
>> Some think we
would have gotten
-
it for 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 it was worth
it to us to
-
pay a more market price
-
so that we could not
have that happen.
-
>> So what about
Merrill's 17,000 brokers?
-
Louis 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. Obviously,
-
we've got $7 billion of
cost savings to get,
-
and so that
means that there
-
will be jobs eliminated.
-
>> Seven billion dollars.
-
>> Seven billion dollars
in cost savings.
-
>> 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've
-
gotten the
financial system
-
in much better shape,
-
but the economy is
still a question mark,
-
and 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
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,
-
toward the end
of the first
-
half of next year,
-
we'll start to see
-
either signs of bottoming
-
or actual bottoming.
-
>> Well, what about
credit card debt?
-
Is that going to be
the next shoe to drop?
-
>> It, in some ways,
-
already is because
credit card losses
-
have risen pretty
substantially.
-
>> Credit card debt
-
and auto loan defaults are
-
part of why the bank's
third-quarter earnings
-
dropped nearly 70%.
-
Louis called the situation
a damn disaster.
-
Do you think your
job is secure?
-
[LAUGHTER]
-
>> I must think
that because I
-
don't think about
that question.
-
>> It doesn't
enter your mind.
-
I threw you a
zinger, didn't I?
-
>> Yeah, you did.
-
>> Did you defeat
Wall Street?
-
>> No, to some degree,
we're part of it.
-
So I don't know that
we defeated it.
-
>> Well, if you're
number 1 and
-
if the idea was
-
to compete with
New York or
-
Wall Street, you won.
-
>> We have won
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
-
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
and 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 subprimes
-
were insanely reckless,
-
wait until you hear
what's coming.
-
>> What's the future hold?
-
>> 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 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
US 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 pedaling.
-
It found that
the subprimes,
-
loans to the least
-
creditworthy 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
exotic mortgages
-
that became popular,
-
called Alt-As
and option ARMs.
-
The option ARMs,
in particular,
-
lured borrowers in with
-
ultra-low initial
interest rates
-
called teaser rates,
-
sometimes as low as 1%.
-
But after two, three,
-
or five years,
those rates reset.
-
They went up, and so did
the monthly payment.
-
So a mortgage of, say,
-
$800 a month could
easily jump to $1,500.
-
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
-
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.
-
>> You can look back
-
at what was written
in '05 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 Alt As compared to
-
what we just saw
on the subprime?
-
>> Well, the subprime was
-
approaching a trillion.
-
The Alt A is
about a trillion,
-
and then you have option
ARMs on top of that.
-
That's probably
another 500-600
-
billion on top of that.
-
>> How many of
these option
-
ARMs would you imagine
are going to fail?
-
>> Well, north of
50%. My gut would be
-
70% 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 little 3% 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.
-
>> 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 come
-
in and move a family out.
-
It's just our job to
do it for the bank.
-
It's just the nature
-
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 who're hiring.
-
We have to hire
people because
-
the demand 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
their 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 110,000
properties for sale in
-
South Florida today,
55,000 foreclosures,
-
19,000 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 downturn,
-
there's opportunity, and
-
vultures are cleaning
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 Alt-A loans.
-
>> There were red
ropes 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 As and
the option ARMs?
-
>> They were essential.
They were necessary.
-
Without the Alt-A or
option ARM mortgage,
-
this boom never
would have occurred.
-
>> It never would
-
have occurred
because without
-
the Alt As and
the option ARMs,
-
many buyers never would
-
have qualified for a loan.
-
The banks and the
brokers were getting
-
their money
upfront 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 Giosmas
-
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% down on each.
-
Now they're all financed
-
with option ARM loans.
-
What did you understand
about the loans?
-
>> Well, unfortunately,
-
I didn't ask too
many questions.
-
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. 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,
-
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 an acupuncturist,
-
so this is just
a side thing.
-
>> You're an
acupuncturist,
-
but you got stuck
in real estate?
-
>> Yeah.
-
>> Giosmas 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.
-
>> 2.4 million?
What's it worth now?
-
>> The asking price
from the lender is 939.
-
>> So it lost $1.5
-
in value in a
couple of years?
-
>> It's a tough 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.
-
>> Miserable. 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?
-
>> 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.
-
[OVERLAPPING]
-
>> We haven't
seen the bottom.
-
>> It's getting worse.
-
>> What do you mean?
-
>> There are
some statistics
-
from the National
Association of Realtors,
-
and they track 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 the
massive supply
-
out there 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 or
-
four or five years
before this overhang,
-
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 market,
-
and that's taking a
little longer to show.
-
But there 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 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 US stocks down
-
nearly 50% from
their highs,
-
we're actually finding
Bargains Galore.
-
We think corporate
America's 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
-
1/10 Americans is now
-
behind on their mortgage.
-
That's the most
since they started
-
keeping records in 1979.
