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Obama faces Wall Street resistance -

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Obama faces Wall Street resistance

Broadcast: 13/05/2010

Reporter: Kerry O'Brien

Financial journalist Roger Lowenstein discusses his book on the economic crisis in the US titled
The End of Wall Street.

Transcript

KERRY O'BRIEN, PRESENTER: Kevin Rudd might have a battle royal on his hands with Australia's
powerful mining companies but the mining lobby here is child's play compared to what US President
Barack Obama is confronting from Wall Street in his attempt to introduce much tougher regulation of
the major banks after the financial market collapse a year and a half ago.

But despite the Wall Street influence the Democrats in Congress have managed to foil a Republican
attempt to water down some of the new rules governing the trading of derivatives a complex
financial practice at the heart of the market collapse.

Even as the US economy climbs out of the recession, with 15 million still unemployed, the experts
continue to rake over the coals, still dazed at the blindness of those at the heart of the madness
that simply did not see it or, did not want to.

Roger Lowenstein, the highly respected financial journalist who's penned four previous books, has
interviewed 180 participants in the maelstrom, to write a definitive account called 'The End of
Wall Street.

I spoke with him from his Boston home for this interview.

You have concluded what failed was the post industrial model of capitalism. What was at the heart
of the model and what was the essence of the failure?

ROGER LOWENSTEIN, JOURNALIST: The essence of that model is we did not need Government or any speed
limits on the financial highways or any regulation. Alan Greenspan told us derivative contracts
negotiated by bankers are self regulated, everything is supposed to be self regulated.

So that model was supposed to deliver prosperity and smooth sailing not to lead to virtually every
bank failing.

KERRY O'BRIEN: What was the essence of the failure?

ROGER LOWENSTEIN: Banks borrowed too much and made a mess of who they lent to. In our property
markets lending money to people without checking to see if they had an income or assets. Lending
them the full balance of their homes. The things that any fourth grade students of finance would
know you cannot do. They lost their heads.

KERRY O'BRIEN: One of the most incredible elements in the book is to the extent of that the boards
of all those iconic Wall Street institutions seemed to oblivious of what was going on in their own
companies.

As the straw was built they were licking up the gravy but this was the Emperor's New Clothes wasn't
it?

ROGER LOWENSTEIN: Even the top managers and directors presumed that the trades were made that they
would be good. The models interceptor gave them the history of what happened in the past, the
mortgage failures and so on, and they should have been on top of this.

The head of Meryl Lynch did not bother to ask in mortgage securities how much the firm owned. He
turned to his fellows and said 'How much of this are we into?' And comes the reply $50 billion.

At that points the firm is dead, it is too late.

KERRY O'BRIEN: Everyone from Alan Greenspan down telling themselves this was the market at its most
pure.

ROGER LOWENSTEIN: The further along one of these things gets you should be more cautious because
prices are getting higher, reports are getting more dodgy the further you go, but just the opposite
happens. People say nothing has gone wrong, I guess we can go a step further; nothing has gone
wrong, we can go a step further.

Like the cartoon where a character goes an inch over the cliff, another inch and it is not until he
is eight feet beyond the cliff he realises there is nothing but air beneath him.

KERRY O'BRIEN: This could be tempting to put it down as to an old pea and thimble trick, but it was
worse than just rogues.

ROGER LOWENSTEIN: Everybody was counting on the next fellow to hold the hot potato when the music
stopped.

People got mortgage loans they could not possibly refinance but they thought they would get a new
loan to pay it off. The guy in the mortgage bank that issued the loan they were thinking it was no
problem to them because they would sell the loan to Wall Street and the Wall Street banks thought
'they don't care if the loans are good because they will sell them to investors'.

Everybody looked one step down the road and when the music stops somebody will hold the risk of it.

Everybody cannot be free of it.

KERRY O'BRIEN: Alan Greenspan at least did confess to the failure, to the false foundation he built
his faith on, but he had gone by then but his replacement had proclaimed, in late 2007 as the house
of cards was crumbling, that 'the banking system is healthy'.

So Bernanke did not see it at the time quite near he was to the thick of it. He is now the
Secretary of Treasury. Many Wall Street bankers whose hands were dirty were there, how can these
people be trusted to craft a solution when they were all part of the problem?

ROGER LOWENSTEIN: That is a good question. You did not mention Larry Summers in the late '90s who
was influential in crushing a proposal to derivatives. He is now the top economic advisor to Barack
Obama.

Bernanke was late in seeing what happened and fully supported Greenspan.

The one bright light is a man named Bill Dudley. He has broken from Bernanke in a very interesting
way. Greenspan and Bernanke maintained it is not the Fed's job to prick bubbles, whose job it would
be I don't know, but Bill Dudley says of course it is the Fed's job.

There is some sign that Bernanke is beginning to evaluate that position. Having lived through this
trauma at least we can say he won't want to live through it again.

KERRY O'BRIEN: Have you met a single senior banker since this unfolded who stopped to think about
how badly this has impacted on American lives and the lives of others let alone the full national
economy and the future of the nation?

ROGER LOWENSTEIN: They seem a bit blind to that. They are talking about why there is so much of a
push for more regulation, why are people blaming bankers, are they being scapegoated?

Many have not heard them say 15 million American are out of work, we did this to them, we deserve
more rules. There is really very little empathy or understanding on the part of the bankers.

KERRY O'BRIEN: What are your observations as you watch the latest chapter with Goldman Sachs
unfold?

ROGER LOWENSTEIN: It raises, it's tremendous wake up call. Even though what they are alleged to
have done does not speak directly to everything that has gone on during the bubble, it has spoken
to the American public very clearly and so it has spoken to Congress and they have got the message
that things have to change.

Whether bankers want limits or not we have to put limits on them, so what happened to Goldman Sachs
is fortuitous.

KERRY O'BRIEN: You highlighted a number of areas needing change. Is Barack Obama on the mark with
what he is trying to get through the Congress with regulation on that front?

ROGER LOWENSTEIN: We have trouble in the US dealing with big complicated issues, you saw that with
health care. There is a lot in the bill I do not particularly like. Some things are not in it but
the Barack Obama bill, which is really a Democrat bill in Congress, is doing one good thing, it is
taking derivatives, the credit default swaps that have grown up outside the architecture of
deregulation, and if the bill passes it will put them under the tent of regulation so we do not
have half the financial system regulated we have the whole thing again.

If it does that it would be a good step for Barack Obama and the Congress.

KERRY O'BRIEN: What is the risk of today of derivatives imploding further?

ROGER LOWENSTEIN: Tremendous. Look at Greece. When we talk about drive it is the, we are talking
about casinos where people can make tremendous side bets. They are not lending money to mortgages,
they are not lending money to Greece or other governments they are just making these huge wagers
where somebody will lose a pot load of money and destabilise the system and they are going on as
they always were.

The focus has shifted to mortgages to southern bonds and so on but they are out there and if you
look back on every one of these crises in the last ten years, derivatives are always in the thick
of it.

KERRY O'BRIEN: As a financial journalist you have been part of the process and the system so what
faith do you have left in the market?

ROGER LOWENSTEIN: We are always going to have these problems. When we saw what happened last week
with these computerised trading glitches, I would have a lot more faith in the market if it were
run by human beings not just computers.

When you talk about the end of Wall Street I wonder why do we allow computers to Marshall more than
half the trades without any human directing them to? When that happens the purpose of Wall Street
begins to get away from us because it is not about people making judgments about investments but
these electronic impulses to trade back and forth with no rhyme or region.

KERRY O'BRIEN: Yet that is the future?

ROGER LOWENSTEIN: It is certainly the future. It is certainly present.