10 Years After The Financial Crisis: Early Warning Signs

Sep 15, 2018
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Exactly 10 years ago today, the global financial services giant Lehman Brothers collapsed, marking the beginning of a financial crisis that decimated the savings and retirements and, in some cases, the lives of millions of Americans.


UNIDENTIFIED REPORTER #1: Lehman Brothers has filed for bankruptcy, and Bank of America is taking over Merrill Lynch in a $50 billion deal.

UNIDENTIFIED REPORTER #2: Right now - breaking news here - stocks all around the world are tanking because of the crisis on Wall Street.

UNIDENTIFIED REPORTER #3: ...Day to day, housing prices are still plummeting. A new survey shows...

UNIDENTIFIED REPORTER #4: ...Pulling out, hedge funds pulling out. Their fear is, we don't know how many more banks will fail.

MARTIN: We're going to revisit that history and look ahead with one of the key players from the era, a woman who sounded the alarm about the impending crisis. She's Sheila Bair, former chair of the FDIC - the Federal Deposit Insurance Corporation. She's a Republican. She was appointed by George W. Bush in 2006, and, over her five-year term, she saw the depths of the crisis.

Sheila Bair, welcome. Thank you so much for speaking with us.

SHEILA BAIR: Pleasure to be here. Thanks for having me.

MARTIN: Lehman Brothers collapsed under the weight of bad debt, mainly mortgage-backed securities. You foresaw in 2006 that that was going to be a problem. Could you just remind us what the problem was?

BAIR: Well, the problem was unaffordable mortgages being commoditized and sold off to investors. We had something called securitization that basically severed the decision to make the mortgage from the risk of whether the mortgage would be repaid. We had a situation where the people originating the mortgages were just getting paid up front and then selling the mortgages off and these securitizations to investors who were not aware of the risk. And that's - that was the core of the problem - massive, unaffordable mortgages, much of it predatory, push-marketed on families, particularly in low-income and minority neighborhoods.

MARTIN: Now, you were the chair of the FDIC, which guarantees deposits if a bank goes bust. What did you see...

BAIR: Right.

MARTIN: ...That caused you to become alarmed about what was going on?

BAIR: Well, my history with this actually goes back to 2001 and 2002 when I was the assistant secretary for financial institutions at Treasury. And we were seeing this predatory lending going on then. It was primarily targeted, again, in low-income neighborhoods. There was a big problem in Baltimore, Cleveland, Boston. There were pockets. So we tried to get industry together for some best practices, realizing that Congress was not going to impose mortgage lending standards. This was going on in the early 2000s. This idea that nobody saw it coming is just laughable.

MARTIN: I want to hear more about why you think they didn't listen in a minute. But first, I just want to ask you to give us the short course and refresh our memories about how the collapse of Lehman spiraled into...

BAIR: Right.

MARTIN: ...The recession. You know, why was there such an enormous knock-on effect?

BAIR: Well, I think it's important to understand that Lehman not only had helped securitize and invest in these very toxic mortgage-backed securities. It also had exposure on derivatives that were tied to how these mortgages perform. Lehmann also was also a borrower - a heavy borrower. And so, as it started getting into trouble, and then when it finally went bankrupt, it defaulted on a lot of its own debt obligations. And when investors saw that Lehman was defaulting on its debt, they said, well, we don't want to lend to these other big financial institutions either that have a lot of exposure to subprime mortgages. And that's really what caused the system to freeze up.

MARTIN: So now that we're in a different phase - let's say we've passed through that crisis - a lot of people are revisiting, and a lot of people have written books, you know, giving their perspective on what happened.

BAIR: Right.

MARTIN: You've been very critical of Treasury Secretary Tim Geithner. Tell me what you think the dispute is about.

BAIR: Yeah. Well, it's - I think it's a fundamental policy debate. And I want to emphasize, I have respect for Tim Geithner. My focus was on homeowners. It was on the mortgages. Banks getting into trouble and not being able to fund themselves, and then they themselves were not lending - that exacerbated the problem. But what really drove this severe recession was the steep drop in consumer spending because people who had previously relied on their homes to accumulate wealth and refinanced and pull out cash were relying too much on that.

You know, people tried to fight us in our efforts to help homeowners by saying, well, these are all a bunch of speculators. And that's not true. Most of them were people just trying to hold onto their homes, and they were desperate to do so. And they retrenched on their consumer spending. They spent down their savings. They spent down their college - their kids' college accounts trying to hold onto that home, trying to make that mortgage payment.

When they couldn't refinance anymore because home prices had dropped, their mortgages were underwater, meaning that they owed more on their mortgage than their home was worth. That's what caused the problem. Tim's view was that the problem was Wall Street. It was with the banks.

MARTIN: My colleague Scott Simon talked to Barney Frank earlier. He asked him the same question. The criticism is that the banks were supported at the expense of homeowners and that this was a bank...

BAIR: Yeah.

MARTIN: ...Big bank-centric policy, and he disagreed strongly.


BARNEY FRANK: If the banks aren't working, you know, who is particularly hurt are people who live paycheck to paycheck.

MARTIN: And what would you say to that?

BAIR: Well, I think that that is the - that's the Wall Street view (laughter). And nobody's saying that we shouldn't have stabilized the banks. But the debate is why we did that but didn't do much to help homeowners and not nearly as much as we should have. And then also, once that system was stabilized, why then we didn't move to impose accountability. Not many people went to jail. A lot of people - a lot's been written about that. Not many people even lost their jobs, frankly.

MARTIN: You've cited a number of warning signs that would suggest that there are - the seeds are there for another financial crisis. Do you see signs of another financial crisis ahead?

BAIR: Well, I certainly see signs of a heavily - of a U.S. economy and a global economy that is overburdened by debt. This is symptomatic of low interest rates. So we shouldn't be surprised that we've got a lot of debt now - government debt as a percentage of GDP is at an all-time high. Student debt - you know, need I say more? We're approaching $1.5 trillion. And that's heavily, again, skewed towards low-income families that are taking on that student debt burden.

So I'm not optimistic. I'm not, given that the political sentiment that's going towards financial deregulation in Washington combined with the extreme amounts of debt, both U.S. and world economy. I think there are a lot of the areas to worry. And, again, I just hope that government leadership as well as corporate financial leadership are prudent and prepare as opposed to just borrowing more, lending more, listing credit standards - the same kind of behaviors we saw the lead-up to 2008 that brought us into such a terrible situation.

MARTIN: That's Sheila Bair, former chair of the Federal Deposit Insurance Corporation. She wrote a book about the financial crisis called "Bull By The Horns: Fighting To Save Main Street From Wall Street And Wall Street From Itself."

Sheila Bair, thanks so much for talking with us.

BAIR: Yeah. Thanks for having me. Transcript provided by NPR, Copyright NPR.