A Fighting Chance (15 page)

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.

Treasury secretary Henry Paulson went before Congress and explained that the financial system had stalled. He insisted that only a government rescue could get things moving again and prevent a complete financial collapse. And thus was born the Troubled Asset Relief Program—TARP.

In theory, TARP had two goals aimed at getting the economy back on track. First, it was supposed to stabilize the banking system. The idea was that if the banks had more cash, they would start lending again, and that would mean that large and small companies could all get back to business. The other goal was that TARP would bring the mortgage crisis under control. The details of the plan were sketchy, but the general idea was that a lot of the TARP money would eventually be used to clean up the terrible mortgages that had been sold to a lot of hardworking American homeowners, so that they wouldn’t be forced into the streets. This second goal was reflected in COP’s statutory mandate: we were specifically instructed to report to Congress on the “effectiveness of foreclosure mitigation efforts.”

As soon as TARP was set up, tens of billions of dollars started flowing to the giant banks. Although a couple of huge financial institutions had already fallen, it soon became clear that Treasury would make sure the other giant banks would survive the crisis. But that didn’t keep credit flowing to the small businesses, and more and more of them were shutting down. At the same time, the tide of foreclosures just kept rising. In those early, terrifying days, TARP seemed to be doing precious little for small businesses or families in trouble.

Ten Questions

So when would our new oversight panel issue its first report? We knew that once we sent out the first one, we would be running on a treadmill we couldn’t get off. By law, we would have thirty days until the second report was due, thirty days until the third report, and so on, for the next two years. We would have no chance to pause and catch our breath—we would have to go all out.

If Congress had set up a panel like this in ordinary times, the date for the first report might have been far into the future, allowing plenty of time for everyone on the panel to get to know each other, conduct research, hire staff, and map out a strategy. But these weren’t ordinary times. The country was in a crisis, and Congress wanted a report now. We could either stand on the sidelines or wade in and do whatever we could to help.

The day before Thanksgiving, we had our first official meeting, which was held by conference call. The new COP still didn’t have an office or any staff. We didn’t even have a coffeemaker. In fact, the last two panelists had just been chosen only the week before. The Republicans had named Jeb Hensarling, a congressman from Texas, and Judd Gregg, a senator from New Hampshire. Representative Hensarling joined our call that day, but Senator Gregg wasn’t available. (He soon resigned, temporarily leaving us with only four members.)

The panel voted to name me chairman, and we agreed to get a report out as soon as we could. We settled on December 10 as our first due date, which meant we had exactly two weeks to decide which issues to address, conduct research, write the report, review it, vote on it, and send it out. Ooh boy.

With the clock ticking, I offered to write a first draft of the report and send it around to the other panelists.

So there I was on Thanksgiving morning, baking a cake. Bruce and I usually celebrate Thanksgiving in Plymouth, just a few miles from Plymouth Rock, where the Pilgrims landed. The Plymouth locale is just a coincidence. Bruce’s sister Gretchen and her family live there, and the relatives all gather at their house. Her husband, Steve, makes homemade pastas and lays out an amazing feast, Italian American style. I offer my thanks by making his favorite dessert, apricot upside-down cake. This year Bruce and Otis would take the cake without me, and they promised to bring back some leftovers.

After I put the cake in the oven, I stared at my computer screen and wondered: What did it mean to conduct oversight in the middle of a raging storm? And what could we actually accomplish?

I figured we were supposed to serve as a kind of watchdog. A watchdog’s job was to bark so that everyone would look up to see a threat. Our economy was collapsing, millions of people were out of work, families were losing their homes, retirement funds were disappearing, and right now one of the very few tools granted to the government to deal with this crash was $700 billion given to Treasury through TARP. How Treasury spent that money could determine whether the economy pulled out of its tailspin and how the recovery would be forged. Treasury had made it clear in our first meeting that they weren’t planning to cooperate with the COP watchdog, so if oversight was going to mean anything, these reports might be all we had.

Meanwhile, if we were going to get this report done in just two weeks, we needed help, and we needed it fast. In time, we would reach out to experts and hire a full staff. But right now, we didn’t have a second to lose.

In those early days, I turned to some of my former students for help. They were young and smart, and, most of all, they were willing to lend a hand on short notice. At that moment, before we had staff or infrastructure, they were more valuable than diamonds.

Ganesh Sitaraman was an American success story. His parents had emigrated from India before he was born. As a kid, he was an Eagle Scout, and eventually he made his way to Harvard Law. In my 1L class, he had his hand up every day, raring to go. Most of my students move on once class is over, but not Ganesh. He kept showing up every week or so to talk about economics and social policy. By the time the crisis hit, Ganesh had graduated, but he was still at Harvard on a fellowship.

Dan Geldon was Ganesh’s near opposite. In a big class, Dan was quiet to the point of invisibility. But it would be a mistake to underestimate Dan: he has an iron will. His older brother once told me that when Dan was seven, the family was eating a meal at McDonald’s. Dan was halfway through a cheeseburger when he put it down and announced that he had decided to become a vegetarian because eating meat wasn’t right. His mom and dad smiled indulgently, and his older brother rolled his eyes. But twenty-five years later, Dan still doesn’t eat meat.

The minute I asked for their help, Ganesh and Dan jumped in. We talked for hours and wrote furiously. Nearly every day, with help from Ganesh, I finished a draft of the report and shot it off to the other panelists. They edited and flagged questions and added pieces and sent it back. Each night at about ten, I sent the latest version to Dan. He worked on it all night, filling in the research and answering panelists’ questions. Each morning, I picked up the draft again, and we started the process all over.

The final report was only thirty-seven pages, which is unusually short for a government report. But we really wanted something that was concise and clear, and that’s a lot harder than it looks.

The country was awash in news programs featuring financial experts who spoke about the crisis using language that to most people sounded like gibberish. Collateralized debt obligations, special-purpose entities, synthetic derivatives—whatever the topic, the explanations offered by the talking heads all had the same subtext:
Only the insiders are smart enough to understand what’s really going on, so just trust us.

I didn’t buy that. In fact, I thought it was the oversight panel’s job to make sure that
everyone
could understand what was going on. The issues swirling around the financial crisis were important—too important to be hidden away. I remembered the early conversation with Mr. Kashkari and the rest of the TARP team at Treasury: instead of going along with the idea that we should “trust the insiders,” I thought oversight ought to mean holding the insiders accountable and making them earn that trust.

Our report started with a grim update on where the country stood. In the preceding three months, 1.2 million people had lost their jobs. Millions more were on the verge of losing their homes. The stock market had lost 40 percent of its value. All three auto companies reported that they were on the verge of bankruptcy. And there was no end in sight; the economy was getting worse by the day.

At this point, a typical report would have kept pumping out more data, but we decided to focus not on what people already knew, but on what they didn’t know. So we asked questions.

Our questions—ten of them in all—became the centerpiece of the report. They were fairly simple, and we wrote them using good old plain English. For example, we asked the Treasury Department:

• Is your strategy helping to reduce foreclosures?

• What have financial institutions done with the taxpayers’ money received so far?

• Is the public receiving a fair deal?

I loved the simple language of the report. Cutting through the jargon and tangled verbiage made it possible for everyone to join the inquiry. Plain language was also about blowing the Bullshit Whistle. (Sorry about the dirty word, but I can’t think of another way to say it.) Yes, the crisis involved complicated financial dealings, but a lot of the supposed complication was nothing more than BS designed to cover up what was going on. And Treasury had already made it clear that they had no plans to be especially forthcoming with COP. The only way to know what was really happening was to ask some plain questions and get some plain answers—no wiggling around, no hiding away.

We submitted the report, and then we made it public.

Another of my former students, Caleb Weaver, discovered that the Senate had a full setup for making video recordings. (It came complete with fake backgrounds—the first question I was asked on the set was, “Do you want the fake plant or the fake window?”) I made a four-minute recording (fake window included) that introduced our panel’s mission and provided an overview of the report. We uploaded it to YouTube. We also set up a website, posted the report so that anyone could read it, and created a portal that would allow people to share their stories with the panel.