It was early evening on Thursday, November 13, 2008, and the financial crisis was battering the country like a storm whose winds gathered strength every day. No one was sure what wreckage might wash up next.
In about ten minutes, thirty or so hungry law students were going to show up on our doorstep, ready for an informal discussion over dinner about what life after law school might look like. The doorbell rang, and I let in a delivery guy who was juggling several aluminum pans of barbecue. I’d already made four trays of peach cobbler, and the iced tea was steeping. Otis, now a glorious one hundred pounds, had just settled down for yet another nap when the doorbell roused him and the smell of the barbecue gave him a newfound energy. He was slobbering and running in circles around the delivery guy, who was a little uneasy about the oversize dog. I was trying to write a check and get the fellow on his way when the phone rang. My caller was a soft-spoken man who identified himself as “Harry Reid.”
I could barely hear him. “Who?” I asked.
“Um, Harry Reid.” Pause. “Majority leader, US Senate.”
“Oh.” (Great start!)
Senator Reid got right to the point—no “how are you,” no small talk. The country was in a crisis, and he wanted me to come to Washington to help provide some oversight of the Treasury Department’s handling of the bank bailout. I didn’t know what that meant or what I could do, but everyone I knew was scared about what was happening to the economy and to the nation. I don’t think I’d ever met Senator Reid, and I really didn’t know why he believed that I was the right person for this job. But if he was calling, it meant he thought I could help. So I said yes. No questions, no negotiations. Just yes.
It had been thirteen years since Mike Synar had called and asked me to help him with the National Bankruptcy Review Commission, and it had been three years since Congress had ripped gaping holes in the bankruptcy safety net. My time in Washington had left me fed up with the whole place. But this was an emergency. The financial system had melted down, and millions of middle-class families were getting crushed, so if Senator Reid asked me to help by mopping the floors or licking envelopes, I would say yes. Besides, I thought that in an emergency, surely people in Washington would dial back on political maneuvering and focus on finding ways to help struggling people. So if Senator Reid thought I could make a difference, it was time for me to go back to Washington.
As soon as the barbecue was eaten and the last student had left, I called Bruce. He was out of town at a conference with a bunch of other history professors. Otis was sprawled across the floor, his belly bulging from the bits of meat and cornbread that the students had slipped his way. I put on my telephone headset and my long white apron and cleaned up the dishes while we talked.
I told Bruce that Senator Reid had asked me to join a five-person Congressional Oversight Panel. COP: what a great name! I wondered if I might actually get a badge and a set of handcuffs—okay, no handcuffs, but maybe a badge?
Six weeks earlier, in near panic, Congress had agreed to authorize a $700 billion fund to bail out the financial system—the Troubled Asset Relief Program, or TARP. The bill that set up TARP also created COP, which was assigned the task of monitoring how Treasury handed out the bailout money.
“This is really amazing,” I said to Bruce. “I can’t wait to meet the Treasury people, to talk about how they plan to use the money. Maybe I should cancel office hours tomorrow and fly to Washington.” I was revved up and ready to go; it felt good to think about helping out.
Bruce was Bruce—happy that I was excited, but a lot calmer than I was. “I haven’t read anything in the paper about a cop.” (Bruce is a traditional guy; he still gets his news from old-fashioned printed newspapers.) “What exactly will you be doing, babe?”
I paused. “Oh. Well. Hmmm. I haven’t seen anything about a cop either, but I guess I’ll get to do cop stuff. You know, check out how things are working, investigate, and tell them if things are wrong. At least I think so.” It occurred to me that Senator Reid hadn’t said exactly what my role would be, so I didn’t have a clue.
It was after midnight when we hung up and I pulled out my laptop. I located the law authorizing the gigantic fund that would go to the Treasury Department to deal with the country’s “troubled assets.” Eventually I found the section dealing with COP. My optimism about how I could help sank a little.
The new law spelled out how a five-member panel would be chosen, how we’d get paid, and how expenses would be reimbursed. But the section describing the duties of COP had essentially one entry: “Submit reports.” COP was supposed to give Congress a report every thirty days. That was pretty much it. Huh: no arrests, no handcuffs, no perp walks.
And what tools would we be given so that we could oversee the distribution of all that money? The statute said we could “take testimony,” but the lawyer in me instantly noticed that COP would have no subpoena powers. We could politely invite people to testify . . . and they could politely decline. (Or impolitely, if they preferred.) We could also ask agencies for “official data,” and the agencies “shall furnish it.” But if we wanted something the agencies deemed “unofficial,” well, we could be out of luck.
Okay, so our authorities were limited. No ability to subpoena witnesses. No power to blow a whistle to stop the flow of money if we thought something shady was going on. And there was no requirement that the secretary of the Treasury explain his strategy to us.
Nope, none of that. It looked like the law setting up COP envisioned that its role would be to write boring reports that would gather dust while the economy tumbled over a cliff. In other words, this new adventure in Washington might not be nearly as productive as I had hoped.
But when Harry Reid had asked, I’d said yes—so I was going, like it or not.
How a Downturn Becomes a Meltdown
Whenever I think of the meltdown, I still think of Flora. (I’ve changed her name to protect her privacy.) She was probably in her eighties by the time we spoke with her in 2007 while conducting interviews for more bankruptcy research. She explained that she and her husband had retired and moved to a small town in the South a few decades earlier to be near family. They bought a modest house. (“That’s all we needed.”) Flora’s husband had passed on, and she was on her own now. Flora said that until recently she had been doing fine, getting by on her Social Security check each month.
Flora explained that she’d gotten a call a few years ago from “a nice man from the bank.” She said he’d told her that because interest rates were low, he could give her a mortgage with a lower payment. She’d asked him what would happen to the payment if interest rates went back up. According to Flora, he’d assured her that “the banks know about these things in advance” and that he would “call her and put her back in her old mortgage.”
She had taken the deal, and before long, her payments had shot up. She paused, then said quietly, “He never called.” The new monthly payment swallowed nearly every penny of her Social Security check. She had tried delaying her payments, borrowing on credit cards, going to a payday lender, but it had all come crashing down.
The Bankruptcy Project, which my co-researchers and I had developed to find out more about families who filed for bankruptcy after the laws were changed, had promised her $50 in return for participating in an hour-long interview. She knew we planned to send the money to the address she’d given us and understood that it would take a few weeks. She explained that next week she would have to leave her home.
“I’ll be living in my car,” she said, “at least for a while. I don’t know how I’ll get mail, so can you tell me how to get my fifty-dollar check? I really need it.”
That’s the real story behind the meltdown: the mortgage market sank, one Flora at a time. Some homeowners made bad decisions or tried to game the system, but many others got trapped by lousy mortgages sold to them by sophisticated financial institutions that should have known better.
By the early 2000s, the mortgage companies could see how much money the credit card lenders were racking up with deceptively low “teaser” rates, and a lot of them wanted to get their turn at the trough. And boy, did they get it. With interest rates effectively deregulated, there was no longer any limit on what these banks could charge, so the subprime lending spree was born.
New “mortgage products” popped up like weeds. Families were offered loan agreements that used unfamiliar terms like “balloon payments” and “option ARMs” and “prepayment penalties.” A lot of people didn’t look too closely at the deals—and like Flora, many relied on the word of a salesman who gave a slick description of the arrangements. As the mortgages got more complicated, lenders found plenty of new opportunities to slip in an extra trick here or a little trap there.
Many lenders made a mad dash for quick profits, abandoning their time-honored practice of carefully investigating job histories and pay stubs before approving a mortgage. Down payments shrank. Penalties and fees shot through the roof. Mortgage lending became so profitable that salesmen went door-to-door, often targeting African American and Latino neighborhoods for their highest-cost, most deceptive products. Other lenders pursued seniors like Flora.
Sometimes they pitched a lower monthly payment, and sometimes they pitched immediate cash. Millions of families had already run up tens of thousands of dollars in credit card debt, and these loans sounded like a lifeline. A lot of TV pundits were telling people that they were fools to pay the high interest rates associated with credit cards. Even Federal Reserve chairman Alan Greenspan urged Americans to “tap” their home equity. The math seemed compelling: Why pay 19 percent on your debt to a credit card company if you could pay 3 percent on a subprime mortgage? Of course, 3 percent was just the low introductory rate. And those glossy ads never showed how your rates might skyrocket over time, as the interest rate adjusted or if you missed a payment or two. And the ads never, ever showed pretty homes with red foreclosure signs out front.
Fueled by all that new mortgage money, home prices caught fire. As the prices shot up, speculators jumped into the game. Everyone seemed to have a story about someone they knew who was getting rich by flipping houses. And as long as home prices kept rising, it was easy to overlook the danger signs. After all, anyone who couldn’t pay the mortgage could always sell their house for a profit—or they could as long as the happy music kept playing.
And then the music stopped. When the market finally collapsed, millions of people were caught in a trap. They couldn’t pay their mortgages, they couldn’t refinance, and they couldn’t sell their homes. By late 2008, one out of every five mortgage holders owed more than their homes were worth. The banks called in the loans, and the foreclosure notices piled up.
The housing crash ripped a huge hole right through the middle class. A home isn’t just a place to live; for most families, it’s their most valuable asset. It’s the savings plan, the retirement plan, and the inheritance all wrapped up in one big, bright package. Pay off the mortgage, and a family has a comfortable life raft, come what may. But if the mortgage is “underwater” and a family owes more than their house is worth, that life raft is made of cement.
When the housing market sank, so did America’s middle class.
Oversight in the Dark
The week after Senator Reid called, I went down to Washington to meet some of the other panel members and start figuring out the business of oversight. We needed to get organized, and we needed to do it fast.
TARP had been passed with an odd mix of Democrats and Republicans, but the effort had been spearheaded by President Bush’s secretary of the treasury, Henry Paulson. When the COP panelists arrived in Washington for the first time, TARP had been law for only seven weeks, but already the Treasury had committed a whopping $172 billion. We were deeply concerned that a lot of money was flying out the door with little oversight in place, so we had asked for a brief meeting with Secretary Paulson and other Treasury officials.
On Friday, November 21, I stood at the big gates in front of the Treasury Building and tried to catch my breath. I met up with two of my fellow panelists: Damon Silvers and Richard Neiman. The three of us were the Democratic appointees; Speaker Nancy Pelosi had appointed Richard, Senator Reid had appointed me, and the two lawmakers jointly had appointed Damon.
Damon Silvers is a big guy—tall, with big hands and big feet. He wears loose-fitting black suits and white wash-and-wear shirts, and he talks with the kind of speed that suggests his brain is full of ideas that are elbowing to get out all at once. After getting three degrees from Harvard—undergraduate, MBA, and law—he could have gone for the big bucks, but that wasn’t Damon. Instead, he organized strawberry pickers in California and shipyard workers in New Orleans, and eventually he became associate general counsel of the AFL-CIO. I knew him a little from the bankruptcy wars, when the AFL had weighed in on our side against the big banks, and I figured I was in good company.
The other panelist, Richard Neiman, had started as a banking regulator, then spent much of his career in the banking industry before becoming New York’s chief banking supervisor. I didn’t know Richard before that day, but I hoped his extensive experience would be helpful.
The Treasury Building is a National Historic Landmark that looks a lot like the White House—only much bigger and more fortress-like. It’s 120,000 square feet of stately columns and white marble, all of it carefully guarded behind iron gates, with no public access. Its security is run by the Secret Service. Behind the gates is the first guard station, where visitors must be cleared; the second security check—including a walk-through metal detector and a full screen of all packages—is located just inside the building. Visitors must be checked twice to make certain they are on pre-cleared lists. After we were allowed to pass, we were met by an escort who walked us quickly to the meeting room.
This was my first visit to the Treasury Building, but there was no time to look around. We were told that Secretary Paulson was not available, but we would be spending a few minutes with other officials, including Neel Kashkari, Paulson’s assistant secretary, who had been named to administer TARP.
We knew time was tight, so as soon as Kashkari appeared we jumped straight to the point of our visit. We pressed him on the status of the big financial institutions: Did Treasury anticipate additional bailout assistance to the giant banks? Could we see the terms of the arrangements that had been worked out so far? Kashkari objected to the word bailout, so we wrangled about that for a couple of minutes. But he was very clear on one point: The big cash injections were done, and Treasury would now concentrate on getting assistance to smaller banks.
The meeting was short, and we were soon back out on the street, outside the heavy iron gates.
Our meeting was on Friday. Less than forty-eight hours later, the news broke that Treasury had just made a huge new commitment to Citibank, a giant bank that had already received $25 billion in TARP money. Now Treasury was giving $20 billion in additional TARP bailout funds to Citibank, plus a $306 billion taxpayer guarantee. The numbers were staggering—and the timing was even more staggering. As best we could piece together from the news reports, at the same time we were receiving reassurances from the head of TARP that the big bailouts were finished, his colleagues were down the hall negotiating this gargantuan deal to bail out Citibank for a second time. In fact, the special inspector general for TARP would later report that this weekend was known in the halls of Treasury as “Citi-weekend.”
I was stunned—and furious. I understood that this was a crisis, and I knew that sensitive information might need to be closely held. I also understood that we might be asked to keep something confidential for a period of time or even that some official might say, “I can’t tell you that right now” and explain why. But that wasn’t what had happened. During our meeting, the team at Treasury didn’t hesitate and didn’t hedge. They sent us out of the room knowing we believed that the big bailouts were over and knowing exactly how wrong that belief was.
Our panel hadn’t even had our first organizational meeting, but whatever vision I’d had of cooperation and candor had vanished. If we wanted any transparency in this process, we would have to fight for it every inch of the way.
Excerpted from "A Fighting Chance" by Elizabeth Warren. Copyright © 2014 by Elizabeth Warren. Reprinted by arrangement with Metropolitan Books, an imprint of Henry Holt and Company LLC.