Gretchen Morgenson and Joshua Rosner were at the Wilson Center in Washington, D.C. yesterday for a discussion about their book – Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.
During the question period, Blair Ruble, who heads the Kennan Institute at the Wilson Center, stood up to speak.
He told a story about when he was at a conference in Elagua, Tartarstan.
“I was pulled out of the conference, and was told the Minister of Economics was coming from the capital of Kazan to see me,” Ruble said.
The country had apparently invested some of its oil wealth with the U.S. government and the Minister was concerned about the lack of accountability after the collapse of the housing bubble.
“They had this oil revenue and they didn’t trust the Russian government,” Ruble said. “I was the first American he could find. We had lunch. After realizing I couldn’t help him he said to me – ‘When did you Americans become Russians?”
“I’m going to prove to you that you really are nothing but Russians,” the Minister of Economics told Ruble.
“Five years from now, mark my words – none of the people responsible for this – will not only not be held accountable – they will be in more important positions – that is what would happen in Russia.”
Rosner pretty much agreed.
“My father was a federal prosecutor and my mother was a criminologist, and her speciality was Soviet criminology,” Rosner said. “As she read our book – she kept saying – Jesus, this sounds like the way it is done there. Every piece of it. You have an entrenched bureaucracy without accountability.”
Rosner said a “code of silence” protects those complicit in the recent collapse.
“All of the parties central to this crisis are unwilling to point fingers, recognizing that their power base comes from the silence,” Rosner said. “As long as everyone keeps silent, each one will recognize that they rise to the next level. You see that throughout our government at this point.”
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Case in point: former Office of Management and Budget Director Peter Orszag.
Rosner said that the Orszag case is “one that I find most offensive.”
“It’s not on the level of Timothy Geithner or Hank Paulson, but it’s troubling,” Rosner said.
“Peter Orszag was co-author of a study paid for by Fannie Mae back in 2000 or 2001,” Rosner said. “It argued that Fannie and Freddie are incredibly safe and sound, that the stress test that was going to be employed by the regulator insured their safety and soundness. And that there was something like a one in 500,000 chance that they would end up imperiled. And even if that happened, the cost to the taxpayers would be a few million dollars. That’s pretty much what the paper said.”
“Orszag ends up as the head of OMB. And when the government takes Fannie and Freddie into conservatorship, he says – there is about a five percent chance that the government could be on the hook for more than $100 billion. Wrong again. No one calls him out.”
“Orszag is now the vice chairman at Citibank. I noticed the other day he put out an op-ed on Bloomberg which was clearly positioned to support his current institution. And nowhere does it say that he had anything to do with the government, the GSEs. And that’s just the way Washington works.”
“He obviously was in that position to add three zeros to his income on the other side,” Rosner said. “It’s not about public service. It’s about self service.”
Morgenson lamented the lack of criminal prosecution.
“I know proving criminal intent is exceedingly hard,” Morgenson said. “But if we don’t get some scalps, you will have left most people with the idea that you can get away with murder as long as it’s involving not a gun but a pen and a financial institution. That’s the wrong message we should send. It’s pernicious and damaging.”
“In the savings and loan crisis there were 839 criminal prosecutions that resulted in jail time,” Morgenson said. “And these were not just low level people. These were CEOs in some cases, CFOs – very high level people. We have had very few this time around. And the people who were on the scene (during the S&L crisis) tell me that because of the regulatory failure during the mania, we are now seeing very few prosecutions. “
”It’s bad enough that the regulators allowed the bad behavior and practices to proliferate. But now it’s going to result in very few prosecutions.”
“This feeds into the idea that there are two sets of rules in America. There is one set of rules for people like you and me. And there is another set of rules for people who are powerful, who are politically connected, who have very high level jobs, who know the right people.”