The Mother of All Bailouts

You focus a lot on fraud and criminality.
Well, there were immense amounts of fraud both on a minor level and on a wholesale level. It starts out with predatory lending, which was really a minor issue in what happened to the bailouts. But it happened with the mortgage brokers, the appraisers, the real-estate agents. From the sleaziest fly-by-night outfit to the biggest banks, everyone had a finger in this. At Chase—now JPMorgan Chase—there was an internal memo advising people how to beat the in-house automated mortgage-approval system. The people who were in the bank had figured out a way to tweak the inputs in order to get a bad applicant approved for a mortgage.

You use the term "nonfeasance" to refer to what the regulators as a class were doing. What do you mean by that?
If you are a crossing guard and you decide to take a break and a bunch of schoolkids get run over by a bus, that's nonfeasance. You can't abandon your post. But essentially that's what the regulators did. Time and again there were opportunities for people to respond to what took place. But they didn't act.

You tally the costs of "bailout nation," and it rises into the trillions. But when we've had bailouts in the past, sometimes we end up being surprised that the ultimate cost ends up being less than projected. We're already starting to get the Troubled Asset Relief Program repaid with interest. So couldn't the ultimate cost be less than we think?
Yes, it's certainly possible. Remember, there are a number of costs that are involved. There's the actual out-of-pocket cost, that's No. 1. So if we put $125 billion into a variety of banks in order to give them capital, we'll see a chunk of that. But there's more. You're making these purchases under duress, and there's the cost of encouraging this behavior in the future. One of the examples I used in the book is that after the Federal Reserve provided $29 billion to JPMorgan to buy Bear Stearns, Lehman Brothers was given the opportunity to have an investment by none other than Warren Buffett. Lehman turned him down. You have to wonder how much of that decision was impacted by a mindset that figured they were bigger than Bear Stearns, so the Fed would bail them out, too. Then there's the last issue of what could we have done with that money elsewhere? We could have used that money to repave every road and rebuild every school in the country and give the entire country health care.

That would be socialism, Barry.
My favorite line that came out of all these bailouts—and remember, most of this nationalization took place not under the Obama administration but under the Bush administration—is that Bush and his people came into office as social conservatives and left office as conservative socialists.

With Stuart Johnson

© 2009