Shel Israel's Twitterville Part 2/2
Learn how Shel Israel became involved in social media, and about the inspiration for his book, Twitterville.
Jill: The financial crisis was 30 years in the making according to award winning financial
reporter and author Charles Gasparino. He traces the roots of the biggest financial disaster since
the Great Depression in his new book: The Sellout How 3 Decades of Wall Street Greed and
Government Mismanagement Destroyed the Global Financial System. Hi Charlie.
Charles: Thank you for having me.
Jill: That's a pretty big title there. So what were those 3 decades in the making? Give me some
highlights for those of us watching who don't want to read the whole book.
Charles: Oh come on you got to read the whole book.
Jill: Or buy the book they don't have to read it.
Charles: one of the things that I tried to do in this book and what the other books haven't
really done is say you know everybody knows what happened in 2007, 2008 and I go into in
great detail in the book but you know what caused 2007, 2008 you know what was this sort of
narrative before that and what I wanted to show is how this security the mortgage bank security
was essentially at the behind 3 sort of blowups in the bond markets, major blowups, 1 in 86, 87
one in 94, one in 1998 that was involved with the long term capital hedge fund implosion and
each time it blew up Wall Street took greater and greater risk until they took the ultimate of risk
which was in 2007, 2008 when the system essentially reached Armageddon levels and what why
did Wall Street take that risk? And another thing that I think a lot of people haven't brought up
which is central to my book is that I show how government essentially enticed the risk takers.
Jill: Well talk a little bit about the government because you know in my previous life as a
financial planner I used to say forget what the government tells you about home ownership is the
most important thing some people shouldn't buy a house.
Charles: Boy you are the few people saying that.
Jill: I know it didn't get me a lot of business.
Charles: That's right. Well you know because just the opposite was going on. I mean there
were 2 in terms of the governments intervention there was 2 things that they did number 1 is the
mortgage bank securities market is in many ways a symptom of government policy, it sort of
emerges as a major business life or Wall Street was in of itself a government effort and I go
through that in the book, the people behind it in the Clinton Administration namely Henry
Cisnaros, Andrew Quamo and George Bush's secretaries I don't let them off the hook either
because they all were it was interesting they were all essentially saying that home ownership isn't
something that should be earned which is what you were saying it's something that is essentially
a right and we're going to make it easy for you to do that, making it too easy for people what
they did was they created tremendous risk in the system but they also in a odd way took home
the home values and took them through the roof because you had so many people buying homes
that shouldn't be buying them.
Jill: Right they inflated the bubble right there.
Charles: and the other part of the government intervention was like when see Wall Street
firms would package these bonds throughout the last 30 years they would hold them on their
books because they would get extra yield out of them, they were very high yielding securities
until they blew up and they always used the blow up cause they're very risky and what the
government did each time they blew up they would go in there and they would throw money at
the problem they would give Wall Street easy money and they would try to prop the market back
up and what they did was create what's known as moral hazard. They went in there and they said
listen there's no consequence to your risk until last year, the last 2 years where no amount of fed
easing, no amount of throwing money at it was going to essentially save the system unless the
government took over the banks.
Jill: Well you know it's an interesting thing because I can imagine that we don't expect
Congress or any administrative officials to truly understand risk but in the book you say that
CEOs didn't even understand the risks that they were assuming. Let me ask you something. Were
the math heads, the geniuses who created the products did they know the risks?
Charles: You know they understood risk in a sort of esoteric way and I talk about this I
mean they all understood, they all had their measurements you know with the government being
involved so much with so much risk in the system that I don't think they're traditional
measurements actually worked and on top of that you had raiding agencies that were raiding all
these things AAA for no one even knows why I mean these were the most bizarre ratings in the
world you throw that in the mix and the chances, the odds of blowing up were obviously much
less than what it was.
Jill: And let's throw one more thing onto the pie cause I know this is one of your favorite
topics, the FCC: Now let me read you a quote because the FCC Chair Mary Shapiro who came
from FINRA after making something like $7 million I don't know why she would take this job
Charles: FINRA the self regulatory organization? Wall Street right?
Jill: Yes exactly and Mary Shapiro said that investors need to see that we are going after those
who engage in wrong doing. That's what she said.
Charles: Pretty scared.
Jill: And you argue the FCC should be
Charles: Yeah because I'm not saying there shouldn't be any watchdogs I just think that
that agency has proved so inept over the years that I don't think there's any reason for it to exist
that they should start over or maybe take all their responsibilities, give it to the FBI where they
start looking at white collar crime. The problem with the FCC and I talk about this in the book at
some length is that it's the people that go there generally don't want to be there. It's like a pit stop
for them. They want to go there you know learn a little bit about the securities laws and then
move on. It's one of the reasons why I believe Bernie Madoff was able to perpetrate a $50 billion
scam and get away with it for 10,20 years even though he was examined by the FCC like 2 dozen
times in those 10 years. The examiners themselves look at someone like Bernie Madoff a major
player someone they might want to work for. Now I'm not saying there's any fraud involved here
but I just think that conflict of interest makes them less skeptical, less rigorous in their
investigation. There's needs to be an adversarial relationship. I think that's why the FCC needs to
be blow up. You throw that on top of the fact that the FCC really didn't understand capital,
they're making a mortgage bond equal to a treasury bond in terms of if a bank holds this much
capital they have to put aside just in case it blows up and that is absurd.
Jill: It is. Patently absurd.
Charles: Even if it is a AAA.
Jill: Exactly and just asking for trouble obviously.
Charles: And we don't know they were far less than AAA's they were Ds and Fs you know.
Jill: Please let's do something fun. Veteran Wall Street reporter you know everybody and you
know them personally so I'm going to
Charles: Some of them.
Jill: name some of the big bold face names on Wall Street and you're going to give me the 1
adjective that best describes these guys. Ready?
Jill: Bear Sterns, Jimmy Cayne.
Jill: Lehmans, Dick Fold.
Jill: Merrill Lynch, Stan O'Neil
Jill: Wow. JP Morgan, Chases, Jamie Donovan.
Jill: Goldman Sachs, Lloyd Blankfein
Charles: Kind of a twerp but smart. Is that an adjective? Kind of a twerp?
Jill: Twerpish. Morgan Stanley's, John Mack.
Charles: I'm not going to give you an adjective. Man's man, good guy, not a pig. But bet
Jill: Ok last one for you. Former Bank of America powerhouse Ken Lewis.
Charles: Oh man. Tragic story. I mean you can't it's hard to give adjectives to these people
Jill: Wait I tell you King Lear.
Charles: You know yeah I mean in a sense that you know I don't think he's a bad guy I
think I mean I think he saw Merrill as a good firm, he was kind of pressured, he would have
backed out of that deal if he could have and he couldn't and he's taking a fall now.
Jill: Charles thank you so much.
Charles: Thank you for having me.
Jill: It's been great. And thanks for watching.
Shel Israel's Twitterville Part 2/2
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