However, one particular ferry ride toward Jersey City in October 2011 stands out. At that point, we were well over two years removed from the bottom of the market and what many in our business recorded as the “end of the crisis,” referring to that March 2009 moment when markets did finally hit bottom and equity prices began to recover. We were three years distant from the Lehman events of September 2008, yet public outcry over the financial crisis had not reached its apex. As I exited to the boardwalk in front of 90 Hudson Street in Jersey City where my meeting was that day, I met that public angst face-to-face.
The boardwalk off the ferry was the entry point from Manhattan to Exchange Place in Jersey City (a sort of secondary Wall Street hub), where financial entities from Goldman Sachs to Merrill Lynch to Morgan Stanley all have prominent offices. Thus it was a logical spot for the now infamous Occupy Wall Street movement to set up shop.
“Give me back my house!” one protester screamed at me, just inches from my face.
“I didn’t take your house,” I naively responded, thinking he actually wanted a conversation.
“You guys got bailed out! Where is our bailout?”
I suppose he could be forgiven for presuming I worked for a financial firm. I was wearing an expensive suit, carrying an expensive briefcase, and taking the financial center ferry from Wall Street to Exchange Place. His accusations had prima facie support in optics, if not in substance. But I could see it wasn’t going to be a worthwhile conversation for me to explain that I worked in wealth management, that my day-to-day work was advising clients on their own capital and decision making. It would also have been pointless to explain that the firms who did extend credit to people who didn’t pay their mortgage bills were not exactly in the wrong to retake property that collateralized the bad debt. After engaging him for a minute, it became apparent he probably hadn’t even had a house repossessed. Regardless of what I thought about the substance (and hygiene) of the movement, it was merely a symbolic reply to what had gone wrong three years ago.
I politely ended the conversation and continued to my meeting. As expected, Occupy Wall Street faded away shortly thereafter. What has not faded to this day is a public distrust of large financial institutions and a general feeling that “the big guys got off scot-free” and “the little guy got screwed.” It isn’t a complete picture. In many ways, it isn’t totally fair. And in some cases, it is patently false. Nevertheless, it is the consensus view for much of society. If it remains society’s default narrative for the crisis of 2008, we all remain vulnerable to a dangerous retelling of the story—a Financial Crisis 2.0, where the same monster simply dons a different mask.
Society’s collective response thus far has been a sort of convoluted blame game, divided almost entirely along political lines. Most on the Right have accurately but incompletely focused their attentions on the flaws of government housing policy. A subset has gone after Fannie Mae and Freddie Mac for their excesses. Another subset has focused on the broader social policy objectives so instrumental in driving the housing mania. Still another subset has focused on easy monetary policy that proved to be gasoline thrown on the housing crisis fire. None of them are wrong, per se; they just aren’t enough. They are an incomplete assessment of the big picture necessary for a crisis of this magnitude.
Likewise on the Left, targets vary from inadequate regulation to breaking up the big banks, but there is neither a complete assessment of what really went wrong before 2008, nor a proper framework for making sure it never happens again. In this convoluted blame game, we’ve managed to further polarize society, while doing virtually nothing to solidify a strategy for avoiding another crisis. If we’re going to offer constructive, preventative measures, we must cure our polarizing addiction to blame.
In a sense, I advocate the “perfect storm” theory of the crisis—all of the elements did play a role in forming the bubble and all contributed to the economic catastrophes that resulted from it. However, other analysts of the crisis have not sought to identify all the culprits, but rather the culprit—the sine qua non, or guilty party, of which it can be said that there would have been no crisis had this decision, force, or policy not existed.
Is it possible that every aforementioned culprit served as a sine qua non in this experience? Perhaps. But the particular and consistent theme all shared, the one that was present in each and every element of each and every guilty party, was an underlying spirit of envy. The green-eyed monster seized the opportunity created by an absence of character, the presence of the intemperate cravings, and utter disdain for the virtues of patience and thrift. No part of our culture was immune. Not Wall Street. Not K Street. And, especially, not Main Street.
Monsters on Main Street
Monsters sometimes wear masks. As all parents know, the time for masks is Halloween, and it was on such a night in 2005 that my wife, Joleen, and I attended a party prior to having children of our own. In this gated community in Orange County, California, parties and elegant houses are the norm, but this party was truly over the top.
We were attending as friends of friends, so we didn’t even know the new owners’ names. They had clearly spared no expense. As we walked into the home through a grand foyer with soaring ceilings, we were wowed by custom inlay marble floors. From the foyer, we could see most of the 8,000-square-foot home. Not a square inch of custom wrought-iron lighting lacked elaborate Halloween décor. The twelve-person surround-sound home theater played scary Halloween videos as guests balanced cocktails, trying not to spill on the French oak floors. The 1,100-bottle wine cellar grabbed a lot of attention, as did the light show in the backyard displaying images of ghosts and goblins.
I vacillated between staring at the Halloween party décor and the stunning wood-carved crown molding. I heard the host tell numerous guests that the hardwood was all imported and they wouldn’t see any other flooring throughout the home other than custom Italian marble. The home’s style was old-world Tuscan—far from my taste, frankly. The host informed each person how “custom” the style was, despite the fact that nearly every home in the community was being built the same way.
When the deluxe game room with wet bar became a “guy’s hangout,” I resigned there after touring the entire home. It was a nice home, but if you’ve seen one Venetian plaster wall, you’ve seen them all. As I sat down, I tuned into a conversation between two gentlemen next to me.
“Did you hear he pulled $100k from his HELOC for this party,” said one man I’d never seen before to the friend sitting next to him.
“Yes,” his friend replied, “he said they almost pulled more but didn’t want to get too crazy.”
“My wife and I just paid $1.6 [million] for our new pad this summer,” the first man replied. “Agent says we can nab $1.9 now. I can tell you for sure my wife will have us home shopping tomorrow after this party.”
He sounded neither totally excited, nor totally dejected as he continued, “When we bought our first home for $700k four years ago, I was so stretched—you have no idea! Now it’s time to break $2 million, and I haven’t put a single dollar into any of the last three homes besides what we’ve flipped. This market is hot, but it just kills me that I am on house number four and here this guy comes in and shows us all up with this beast! I liked our house when I bought it, but now it’s embarrassing.”
I don’t know if this gentleman and his wife went shopping for homes the next day or not. If they did, they would probably have been able to buy a $2 million plus home with nothing down at the time. They would have received multiple offers to buy their current “embarrassment” within just a few days. Such was the easy housing market in the years before 2008.
The flips continued for another year, with artificial equity being rolled into new homes to make mortgage notes feel manageable. Low interest rates helped monthly payments feel serviceable. In a more normal world, I suspect the income of this gentleman would have been more appropri
ate for a $700k to $1.25 million home (and even that assumes a low-interest-rate environment). But these were not normal times, and circumstances allowed the home sticker price for folks like this gentleman to exceed $2 million.
This scenario was common in Orange County and all around the country. Although the dollar figures varied market to market, American families had become engrossed in a frenetic game of “keeping up with the Joneses,” a game that had gotten completely out of hand as they fed the insatiable, green-eyed monster.
As my neighbors—and yours—rushed to flip houses from Irvine to Iowa, another conversation occurred on Forty-Eighth Street and Seventh Avenue in midtown Manhattan. There in 2005 and 2006, Dick Fuld, CEO of Lehman Brothers, sat atop the forty-first floor of a spectacular office metropolis. Fortune magazine had just run a puff piece on him that is now (with the gift of hindsight) painful to read. Fuld was an ambitious man, a competitive man, who had certainly done some impressive things after taking over as CEO after 1994. No one doubted Fuld’s tenacity, though we now know more of his aloofness and even arrogance. But other forces were at work in that high-rise office, forces not all that different from the conversation I overheard at my neighbor’s elaborate Halloween party.
“These guys won’t let up,” Fuld said, referring to a series of high-profile real estate purchases that his former rivals had recently made (Stephen Schwarzman and Pete Peterson of private equity behemoth Blackstone). “I don’t care what it takes—I want it,” continued Fuld, referring to the Coeur Défense office complex in central Paris that Lehman closed on a short time later for the not-so-bargain-basement price of $2.9 billion.12
When the deal closed in 2007, it represented the highest price paid for office space ever in the history of humanity. Did this particular $2.9 billion office acquisition sink Lehman Brothers? Of course not. And that particular gated-community conversation didn’t sink the U.S. housing market, either. But the shared monstrous mentality behind both conversations set the scene for the disastrous financial collapse that followed.
There is not one iota of difference between the conversation at the Halloween party in Irvine and the one on the forty-first floor in Manhattan. The dollar amounts and economic implications may vary on the surface, but the monster at the core is the same—envy. While one is of a more institutional variety (corporate envy in the halls of Lehman) and one is of a more retail variety (neighborhood envy of “keeping up with the Joneses”), both capture the root cause of the 2008 financial crisis in a word we don’t hear much anymore: covetousness.
The truth is this: while Wall Street was riddled with both covetous greed and arrogant incompetence, no financial crisis of any kind could have taken place without the envious and covetous irresponsibility of the people living on good old Main Street, USA. The biblical edict of “thou shalt not covet thy neighbor’s house” may be ancient, but it proved most prescient in 2008.
The aspiration for a better house is not to be condemned, but mere upward mobility was not the story behind the real estate bubble of 2000 to 2007. It was a reckless mobility driven by an epidemic of instant gratification. Artificially inflated real estate prices gave way to even more artificially inflated prices, and a society of desperate perpetrators used various financial machinations to get more right now “because my friend has it.”
When mobility and aspiration meet patience, diligence, hard work, thrift, and investment, the result is often a better house, new floors, a nice Halloween party, and all such luxuries of an abundant life. But when aspiration is driven simply to impress others, and to do so by substituting the aforementioned virtues for haste, sloppiness, and financial irresponsibility, the result is disastrous.
The Subprime Housing Myth
Before we proceed, it is important to bury a myth that has implicitly (and often explicitly) been included in nearly every narrative of the financial crisis, despite it being mathematically absurd. It is the myth that “subprime” housing loans caused the crisis.
For this discussion, I am defining “subprime” as those cases where people of very low income and credit quality bought highly overpriced houses with very risky loans and lost those houses when the payments became too much to bear. If one defines “subprime” more broadly as any form of nontraditional mortgage, the theory becomes more reasonable, but the buyers and borrowers at the heart of the 14 million crisis of home foreclosures were not merely those extreme cases of a $35,000/year gardener buying a $500,000 home. At the heart of the financial crisis were millions of people who could afford their home payment, but realized that the sticker price they paid was far more than the present resale value of the home, and thus made the morally questionable decision to walk away.
My intent is not to parse the wisdom or lack thereof in each individual circumstance, but rather to allow the data to reveal the inescapable conclusion. The bubble-like behavior—while doused with kerosene by a reckless monetary policy, accelerated by a dangerous government housing agenda, enabled by a failed regulatory framework, and facilitated by a short-sighted and incompetent financial system—was still fundamentally at its root a byproduct of human irresponsibility in a culture of insufficient thrift and virtue.
For our purposes, I’ll divide “Main Street” into several categories. Just as “Wall Street” is too broad of a term to use to refer to all mortgage lenders, rating agencies, investment bankers, traders, risk managers, hedge fund managers, CEOs, and commercial bankers (each of whom played a role in the crisis, but none of whom owned the entire supply chain of the irresponsible financial action that took place), so “Main Street” requires greater specificity.
The media and broader societal narrative has defined “Main Street” as “the victim” and “Wall Street” as “the perpetrator,” thus allowing a prebaked conclusion to the question at hand. But since very few sensible people believe Goldman Sachs forced a homebuyer or mortgage borrower to take out a loan, and even fewer people believe they (or any other Wall Street firm) forced homebuyers not to fulfill their obligations on the loan, it behooves us to dig deeper into what roles each actor played.
The Main Street Players
We can think of the Main Street players as four unique actors:
1.The Swindled. These actors were the very poor and naïve who truly did not understand any part of what they were doing when they signed loan documents obligating them to payments they could not afford. In short, they were duped by predatory lenders.
2.The Reckless. These people irresponsibly encumbered themselves through mortgages or cash-out borrowing they could not afford. But they understood the risk associated and proceeded anyway, out of either the belief that continuously rising home prices would fix everything or out of callous disregard for consequences.
3.The Gamblers. This group was financially capable and reasonably educated. They rolled the dice and speculated all the way. When they lost the bet, they recognized the economic convenience of a strategic default. They chose to walk away from their obligations with the presumption that there would be no negative consequences to their income or balance sheet. And they were right.
4.The Diligent. The final players were those who missed no payments in the financial crisis and, therefore, added no stress to the financial system. They faithfully made the payments they had promised to make.
The Diligent bear no responsibility for the financial crisis for the obvious reason that they fulfilled (and continue to fulfill) their financial responsibilities. In an indirect way, however, they may deserve some criticism for being inadequately agitated at the Reckless and the Gamblers. The Diligent seem to lack an appreciation for just how unfair the actions of the other players really were. Instead, many have joined the chorus criticizing easy institutional targets of earlier chapters. But my desire for righteous indignation doesn’t address the culpability of the other Main Street players, so I focus on the remaining three.
Predatory Lending: The Swindled
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Research indicates that some people were swindled. There were incidents of fraud and predatory deceit, but those cases were outliers. To be sure, the media has had a field day with these outliers, but the reality is that total mortgage losses suffered during the financial crisis were roughly $1 trillion. Yet losses from bank-perpetrated fraud of indigent or mentally unaware consumers are estimated to not be even a drop in that bucket.
To clarify, being an unqualified borrower targeted for loans does not include one in the Swindled. Unscrupulous dealers (the mortgage brokers) often were on one side of these transactions with buyers (the borrowers). We’ve already established that many involved in the supply chain didn’t care about what was best for the borrower, what was best for the lender, and certainly not what was best for the overall financial system. However, when I talk about the Swindled, I refer to instances where lenders actually lied to customers about the interest rate or cost of the mortgage, where documents were manipulated, and where papers were being force-fed to a borrower who could not be expected to legally or morally comprehend what was happening.
There is little data available as to how often these most severe cases took place, but what we can know is that: (1) where these incidents did take place, they represent a perverse violation of business ethics and human decency; and (2) they were not anything close to being a systemic factor in the overall financial crisis. It is impossible to know what degree of financial sophistication these borrowers had, but the notion that over ten million mortgage borrowers representing well over $700 billion of borrowing were people without even a basic understanding of monthly payments or total debt liability simply defies imagination.
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