Other People’s Houses

What’s most depressing about Jennifer Taub’s new book “Other People’s Houses” is her authoritative argument that the recent financial crisis did not result from isolated policy decisions and fraudulent business practices of the few years leading to 2008. Instead, our recent Wall Street crash played out already proven policy failures from the savings-and-loan crisis of the 1980s.

Even moral hazard, the surrender of discipline for banks “too big to fail” that epitomized the bailouts of 2008, Taub reminds, originated in 1984 with the bailouts of Continental Illinois National Bank and successive taxpayer rescues of American Savings and Loan, the largest S&L in the nation.

Professor Taub, a colleague and friend, teaches at Vermont Law School and previously served as associate general counsel at Fidelity Investments. With unique credentials, she can both explain the intentional complexity of Wall Street products and Washington regulation without glossing over contradiction and nuance.

Unlike the majority of crash pathologies that focus on Washington players such Timothy Geithner’s “Stress Test,”  Sheila Bair’s “Bull by the Horns,” or Andrew Ross  Sorkin’s “Too Big to Fail,” Taub’s book spends quality time outside the beltway. Her narrative follows real individuals, from rogues who pillage the banks along with their lieutenants, to regulatory chiefs often aligned with industry interests along with a few heroes who actually understand and fulfill their responsibility to protect taxpayers, and finally, victims of this morass.  And we meet the Nobelman family.

The Nobelman’s and their mortgage help connect this three decade story of dysfunction. In 1984, Harriet and Leonard Nobelman borrowed $68,250 for a one-bedroom condo.  American Savings and Loan Association held the loan. Over the years, American would be bailed out several times in several reincarnations. In one sale, it went to Washington Mutual. When that firm failed, it went to JP Morgan during the height of the 2008 financial crisis, completing the bridge from the S&L crisis.

The Nobelmans also ran into financial trouble when, in 1990, they lost their jobs and encountered health problems. They sought not a bailout, but bankruptcy relief.

The Supreme Court eventually ruled against the Nobelmans.

Because lenders understood a mortgage didn’t come with the same consumer protection as other loans, Taub contends that Nobelman v. American Savings Bank gave lenders “added incentive to place people in homes they could not afford.”

Taub doesn’t pin the 2008 financial crisis on this decision alone. For example, she runs through a devastating critique of deregulation of the last 15 years in the chapter “Legal Enablers of the Toxic Chain.” After the banks made reckless loans, the pools of mortgages won lax accounting oversight with risk disguised by unsupervised bets at institutions with far too much debt. JP Morgan, inheritor of American Savings, figured near the center of that toxic chain right through the notorious London Whale bets that dramatized banking too big to manage and regulate.

Responding to the 2008 crash, reformers brought many ideas to Congress, including reversal of the Nobelman decision. The real impact, Taub recounts, would be in loan-making itself. With the potential for bankruptcy, economists of the Cleveland Federal Reserve Bank speculated that it “worked without working,” as loan makers would be less likely to make unaffordable loans in the first place, and seek an out-of-court settlement in the case of problems.

Following passage in the House of a “principal reduction” measure, Sen. Richard Durbin (D-Ill.) proposed a parallel reform in the Senate. But he ran into a buzz saw of 60 financial service, insurance and real estate firms that unloaded $40 million in lobbying in the first quarter of 2009 to fight this and other reforms.  President Obama, who originally endorsed the idea as a candidate, reversed course under the advice of his new Treasury Secretary Timothy Geithner.  Durbin’s measure drew 45 votes, all Democrats. Without White House support, it fell short. “Obama gave it away on the way to the White House,” concluded Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee.

Taub frequently notes the pernicious role of money in financial policy, both in large dollar flows and in micro-deals. For example, Lewis Ranieri, the originator of mortgage-backed securities, sought a favorable tax ruling on a proposed structure, but ran into opposition from a Treasury Department analyst. So Ranieri “hired the analyst away from the Treasury.” Such mischief forms the tapestry of policy.

“Other People’s Houses” achieves numerous goals — history, deconstruction of financial products, policy critique. Throughout, Taub returns to the real people who suffer at the hands of financial rogues and their legal enablers.  Too often, these victims appear as statistics; Taub reminds us they have names.

Bartlett Naylor is the financial policy advocate for Public Citizen’s Congress Watch division.