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Economists Try Target Practice in a Fun-House Mirror

Posted by tothewire on February 17, 2009

Henry M. Paulson Jr. waiting to address the U.S. Chamber of Commerce in Washington last year, when he was President Bush’s secretary of the Treasury.

Henry M. Paulson Jr. waiting to address the U.S. Chamber of Commerce in Washington last year, when he was President Bush’s secretary of the Treasury.

“Everybody does it,” is what high school students say when caught committing an offense. And now that the economy has plummeted, it’s the defense offered by lenders, borrowers, brokers, investors, credit agencies, government regulators and elected officials alike.

Everybody was doing it, and nobody wanted to stop it. As Michael Francis, a former Wall Street investment banker puts it in “House of Cards,” a documentary on CNBC on Monday, “No, there was never a time where somebody said: ‘Hey, hold on. Let’s not do this.’ ”

Collateralized debt obligations are so complicated that even the former Federal Reserve chairman Alan Greenspan says he finds them bewildering. But now, in hindsight, it’s just as difficult to fathom the individual gambles and collective folly that brought down Wall Street and cost millions of Americans their homes, jobs and retirement savings. And that’s why “House of Cards” and “Inside the Meltdown,” a “Frontline” documentary on most PBS stations on Tuesday, are so gripping.

So much is still at stake that it’s hard to remember what happened even a few months ago when the Bush administration and Congress gave Wall Street its first bailout.

“Inside the Meltdown” is a post-traumatic-stress flashback: a searing look at how the treasury secretary at the time, Henry M. Paulson Jr., and others acted — and failed to act — in those fraught days in September when the world’s entire economic system seemed on the brink of evaporating. “Frontline” concludes that by refusing to rescue Lehman Brothers, Mr. Paulson kicked off the worldwide credit freeze and deepened the recession.

CNBC’s inquiry weaves together Wall Street bankers, first-time homeowners, mortgage brokers and even the mayor of a fishing town in Norway. Blame is spread far and wide, with no one culprit singled out — though Mr. Greenspan, unburdened by remorse and blithely philosophical about the inevitability of it all, indicts himself. Of the two programs this one is broader, more comprehensive and ultimately more compelling.

Oddly enough the PBS offering is showier and more melodramatic, embellished with the kind of foreboding sound effects and stark black-and-white photographs that are a specialty of Sept. 11 films or accounts on History of the Cuban Missile Crisis. “Frontline” builds a persuasive case against Mr. Paulson but relies for the most part on secondary sources to do so: academics and reporters.

A shot of black limousines gliding up to Capitol Hill sets the stage for one of the most dramatic moments in the narrative, the Sept. 18 meeting in which Mr. Paulson warned Congressional leaders that without a huge bailout, the financial system would melt down. Senator Christopher J. Dodd, Democrat of Connecticut, recalls the meeting: “There was literally a pause in that room where the oxygen left.”

Mr. Dodd and Representative Barney Frank, Democrat of Massachusetts, are the only members of Congress interviewed in the piece, which is a weakness. Many voters hold Republicans and Democrats equally responsible for oversight failures. “Frontline” holds these politicians up as reliable, unbiased witnesses, but some viewers may feel they don’t deserve that trust.

“Inside the Meltdown” is illustrated with sweeping aerial shots of Lower Manhattan and the skyscrapers of Wall Street. CNBC’s David Faber, the reporter behind “House of Cards,” takes his camera onto a helicopter with a Southern California public health inspector to look down at a patchwork of slimy green backyard swimming pools left to fester after the houses were foreclosed.

“This is the pulse of the subprime industry, the nerve center,” says Lou Pacific, a former officer at one of the country’s busiest loan companies, Quick Loan Funding. “This is where it all started and this is where it all ended.” (Daniel Sadek, the founder of Quick Loan Funding, which is now defunct, was pocketing $5 million a month and spending it on mansions, antique sports cars, Las Vegas junkets and a car race movie, “Redline.”)

Almost like the Spirit of Christmas Past, Mr. Faber visits homeowners, lenders, bankers and Wall Street dealmakers to collect a Dickensian cast of characters who explain how they were sucked into an “affluenza” bubble that seemed unbreakable. The gullible range from Ira Wagner, formerly a senior managing director at Bear Stearns, to pizza delivery men who became loan officers, that is, salesmen, with no training, regulation or even dim understanding of what Wall Street was doing with the mortgages they handed out like supermarket coupons.

Like Diogenes, Mr. Faber hunts for a person who saw the crash coming and tried to do something about it. He does, but the whistle-blower is not a Wall Street banker, an S.E.C. investigator or member of Congress: it’s Kyle Bass, a Texas hedge fund manager who looked closely inside the subprime market and decided to bet against it. (His fund went up 600 percent in 18 months.)

The CNBC documentary closely follows Mr. Bass’s line of thought, but for perhaps obvious reasons it does not cite a letter of warning he wrote to investors in July 2007. “Consequently, when I hear people like Kudlow on CNBC tell their viewers that the subprime problem is ‘contained,’ I can hardly bear to watch,” Mr. Bass wrote, referring to Larry Kudlow, host of CNBC’s “Kudlow & Company.”

So many people didn’t see it coming that it’s hard to know where to assign blame. “Inside the Meltdown” and “House of Cards” reveal why even the most culpable don’t blame themselves: everybody did it.




One Response to “Economists Try Target Practice in a Fun-House Mirror”

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