Have We Learned Anything From the Financial Crisis?

By Brian Summerfield, Online Editor, REALTOR® Magazine

When the Bourbon royals took over France again after the violent revolutions and Napoleonic wars that spanned more than two decades through the late 18th and early 19th centuries, the famous French diplomat Talleyrand supposedly said they had “learned nothing and forgotten nothing.” In other words, they immediately resumed the behaviors that had led to those national catastrophes in the first place.

Bethany McLean

Bethany McLean

Unfortunately, Talleyrand’s quip may apply to the United States during the Great Recession that started in late 2007. In remarks this morning at a 30 Under 30 event held in NAR’s Chicago office, Bethany McLean, co-author of the best-selling All the Devils Are Here, said the response to the financial crisis shows how much we — politicians, business leaders, regulators, and the public — haven’t learned. The book, written with New York Times columnist Joe Nocera, is a riveting account of the financial innovations and regulatory decisions that led to the near collapse of the world economy in the fall of 2008. McLean is a contributing editor with Vanity Fair, a columnist for Slate, and a frequent guest on Bloomberg news.

Part of the problem with bringing about real change is the complexity of the crisis. “What makes the narrative unsatisfying is that there’s not one simple explanation for it,” she said.

Attempts to boil it down are often politically motivated. For instance, some analysts want to pin the blame for the meltdown entirely on the government and thus use government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac as a scapegoat. However, while the GSEs make convenient villains, they didn’t actually play a “determining role” in the financial meltdown, said McLean, who characterized them as a sort of red herring in the story.

At this point, no one is seriously proposing that the government get entirely out of the secondary mortgage market, McLean said. Without the government guarantee, she acknowledged, the 30-year mortgage would be history. However, she questioned the wisdom of blending public and private functions in the market, because it leads to a situation where risk is socialized (that is, spread to taxpayers) yet profits are privatized (with the beneficiaries being corporate executives, shareholders, and employees of specific companies). That’s a position NAR has taken as well in its testimony to Congress on proposals to reform Fannie Mae and Freddie Mac. “The rich irony is that’s exactly what we’ve done with the big banks. The banks were the biggest critics of Fannie Mae and Freddie Mac,” McLean said. “Yet they enjoyed the benefit of private gain and socialized losses, because the government determined they were too big to fail.”

While Fannie Mae and Freddie Mac have taken the greatest heat — Fannie, in particular, has been a continued target because of the challenges it has had regaining profitability — individual borrowers have also been faulted for making poor financial decisions. McLean said  she was initially critical of consumers — and still maintains the need for personal responsibility — but the research she conducted for her book showed that, to a much greater degree, it was perverse financial incentives in mortgage lending that led to the breakdown.

“The industry sold [consumers] bad mortgages,” she said. “Everyone could make money, even if the borrower couldn’t repay the loan.”

So if not Fannie, Freddie, and borrowers, which parties were primarily to blame for the financial crisis, and what could have been done differently in the immediate aftermath?

McLean put most of the responsibility at the feet of the big Wall Street investment banks and the institutions charged with regulating them, such as the Securities and Exchange Commission (SEC), the Federal Reserve, and the U.S. Treasury. She said the biggest, most meaningful step that could have been taken in the wake of the downturn would have been to break up the so-called too-big-to-fail banks.

Instead, the opposite occurred. Lehman Brothers disintegrated, and Bear Stearns and Merrill Lynch were bought by other financial institutions as part of bailout packages. Now, the too-big-to-fail banks are even bigger, and, consequently, more assets are consolidated in fewer enterprises than ever before.

The Dodd-Frank bill passed last year only gets at the margins of financial reform, she said. “Much of Dodd-Frank was a blueprint of what Congress wanted to see,” McLean explained. However, the details of interpretation and enforcement have been left to the regulators, and provisions such as the regulation of derivatives and the new Consumer Financial Protection Agency are being fought tooth-and-nail by big banking interests.

At play is what McLean termed “implicit corruption” caused by the fact that regulators are so close to the industries they’re regulating and share the same pro-market mentality. In fact, many high-level regulators came from law firms that count the biggest Wall Street banks as clients. On the one hand, she said, these people know high finance better than anyone else. Unfortunately, they have as much of an interest in protecting that industry as policing it.

“That aspect of corruption is hard to fix,” McLean said. “Until you outlaw greed or strip selfishness out of human nature, some of this stuff is inevitable.”

At this point, the best way to fundamentally change the conditions that led to the near-collapse of the financial system is to alter the mentality at all levels by putting a greater focus on responsibility, education, and skepticism.

For a consumer, that means understanding that a financial instrument that’s being pushed on you isn’t necessarily in your best interest. For home buyers, it means taking a practical view of the value of home ownership.

“If the home turns out to be a great investment, that’s wonderful,” she said. “But I don’t think it should be compared to other kinds of investments. Your home should be a place to live, a place of security, and I think we’ve lost sight of that.”


McLean served as a primary consultant to the HBO dramatization of the financial crisis, “Too Big to Fail,” which premiered last night on the network. A preview clip is below.

Also, to read more about the causes of the financial crisis, go here and here.

Brian Summerfield

Brian Summerfield is Manager of Business Development and Outreach for NAR Commercial and Global Services. He can be reached at bsummerfield@realtors.org.

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  1. No we have not. Simply because we consumers will always point fingers to Government, institutions, Wall Street and push the blame rather than take individual responsibility for own behavior. Consumer Behavior needs to change.

    WALL STREET responds with music video “Greed Is Good” blaming Main Street for the financial crisis –


  2. Jeff Frazier

    I thank you for publishing this article and for showing the expanded trailer for the Too Big To Fail film.

    It is about time that folks within the real estate practitioner field start talking publicly about the world of Complex Derivatives as they related to residential mortgages, and then the securitization process through Residential Mortgage Backed Securities.

    It seems like I have been the loan wolf speaking about these since the week Bear Stearns collapsed (April 2008). When I did mention them, essentially all of my fellow practitioners either didn’t care to learn about them, and the rest simply walked away with glazed-over eyes after even a cursory explanation was given.

    Based on the unbridled usage of the derivative products (Collateralized Debt Obligations, Structured Investment Vehicles, OTC Derivatives, Credit Default Swaps, etc.) in the past decade due to the Commodity Futures Modernization Act, passed in the waning hours of the Clinton Administration in December of 2000 — and which I believe the Bush Administration had as many as 5 opportunities to repeal or hold back — I am now embarking on my M.B.A. to better understand them, and to possibly help shape the new economy (if we end-up having one) within the next few years. In the interim, have spent years learning privately about the financial crisis, and its essential roots (derivatives).

    One of the main clues to me that something was really amiss was when the trader at Societe Generale (the largest bank in France, and one of the largest in Europe) lost 7.25 billion over a weekend in early Summer 2007 due to bad trades with derivatives. (This happened only about a month after there was a classic depression era run on Northern Rock, a huge British bank, which was failing due to derivatives, as well.) On Monday morning, all the major business papers and media outlets were skewering this trader. I heard some really harsh and rash words to and about him. On Thursday of that week, however, I recall seeing his his lawyer say publicly, with his client to his side: “Don’t blame my client. Blame the Bank Board. And blame the U.S. Federal Government.”

    As a historian by training, that got me wondering greatly what he meant. I then recalled someone high-up in the Bush Administration who spoke when Enron collapsed. He said something to the effect of: ‘See what happened to Enron. This is essentially what will happen the the United States in the next 8 or 9 years unless we repeal _________.’ I forget what he called what it was to be repealed — but I thought about that for years and years, and wondered what he meant. I could not remember when it was said, exactly, so I could look it up, but it never set well with me.

    Toward the end of that Summer (2007), and into the Fall and Winter, I saw one mortgage company after another fold — and usually so “overnight.” Inusrance companies were folding as well.

    Then, in March of 2008, the largest ‘supplier’ of mortgages, Freemont Mortgage Company, also failed. I then began to really worry — but still could not put my finger on the issue — but I still recalled what that Bush Administration spokesman said . . .

    And then Bear Stearns collapsed in early April. And I heard former Commodity Futures Trading Commission (CFTC) attorney (and now law professor), Michael Greenberger, interviewed on National Public Radio. The interview was almost 40-minutes long, as aired over Fresh Air.

    Greenberger tied it all together (for me) by pointing the finger at the merging of commercial and investment banks in 1999, and then freeing-up of the derivatives market from any federal oversight, and from any meaningful state oversight, in 2000.

    At that time he asked rhetorically: “Is Bear Stearns the mine disaster? Or is it the canary in the mine, foretelling even greater danger to come.” He answered his own question by saying that it was the canary — but only time would tell.

    He was right. It was the canary. And time certainly told.

    If the Congressional Oversight Committee (the mandated watch-dog) of TARP is right, then we are looking at 40 percent to 60 percent of all commercial mortgage backed securities (CMBS) financing to be in default by 2013/2014, when they start resetting since they were based on the 10-Year-T-Note. As of March 2010, I believe that Marcus and Millichap reported that it was already 16.8 percent.

    That is the proverbial second shoe to drop, and nobody is talking about it — and that is bothersome. Timothy Geithner said in early 2010 that “he would manage it” if it happened, but there is no guarantee that he will be the Secretary of the Treasury at that time — nor that he can actually do something about it, then . . .

    I might add that the vast majority of CMBS financing was non-recourse. That is, that the borrowers of the loans are not responsible for them, in the case of default. And since they were regularly 30-year amortization loans, little principal has been repaid. Additionally, since these loans were issued on properties about $1.5 million and above, then, and assuming MACRS depreciation (and even more accelerated depreciation than that through cost segregation), the owners will have made their money already, and can walk pretty easily.

    Please note that I am not against the family of derivatives — the serve a function in the economy. However, I am dead against the unbridled usage of them as we saw in the last decade. To me, they simply greased the tracks for the financial imbroglios we were in, are in, and will probably continue to be in, for the foreseeable future.

    I hope that the future is brighter. However, my guess is that we are still just in the first few innings of this rather long ball game.

    I watched Too Big To Fail, and it captured the essence of the crisis, well. I think that this should be near mandatory viewing for all practitioners in real estate. It can only benefit us as fiduciaries for our clients — the main calling of a real estate practitioner.

    Jeff Frazier
    EXIT Keystone Realty
    Glenside, PA

  3. kria

    For years I had to be lender police as a realtor.. Now it is too far on the other side… Greed that is and will be the problem