Wednesday, March 26, 2008

Scapegoating the Housing Crisis

Where Are Our Insulls?

When Franklin Delano Roosevelt was campaigning for the presidency in 1932, he gave a powerful speech in Portland, Oregon that named a scapegoat for the Great Depression. It was Samuel Insull, the Icarus-like utilities baron who had left the country after his corporate empire of holding companies spanning 6,000 communities was plunged into receivership. It was the biggest American corporate failure in history to date.

At the time, FDR decried ``the Ishmaels and the Insulls, whose hand are against every man.’’ It was widely believed that Insull had absconded with millions of dollars, leaving more than 600,000 shareholders with worthless paper. The fact that the opposite was true didn’t dissuade Roosevelt from pillorying Insull, who had spent his entire fortune and went into debt in an attempt to bail out his companies. Insull had gone from being one of the most powerful and respected businessmen of his time – one of the reasons people were still buying his securities well after the 1929 crash -- to the Simon Legree of finance.

As Congress, presidential candidates and prosecutors try to unravel who was responsible for the housing debacle and move forward, where are our Insulls?
Although having a single scapegoat for such a complex disaster that had millions of co-conspirators is ludicrous, it seems that the corporate titans who had some culpability are not only given a pass, they are silently exiting the public limelight with outrageously generous compensation packages.

Take Angelo Mozilo, the chief executive of Countrywide Financial, which doled out thousands of the riskiest mortgages. After earning $42 million at the height of the housing bubble in 2006, he left the company, recently acquired by Bank of America, with a $120 million package, including $36 million in severance, according to Congressional testimony. While I’m sure Mozilo earned his pay during the salad days of the company, he did obscenely well considering the abysmal risk management job his company did in screening out qualified buyers.

How about Wall Street chiefs Charles Prince of Citigroup and Stanley O’Neill of Merrill Lynch? Both were forced to leave their companies after their firms lost billions on subprime loan vehicles, neither receiving a cash severance. Don’t pine for them, though. O’Neill was entitled to $160 million in stock awards and other compensation while Prince was due almost $23 million in stock plus a $1.7 million pension.

All three gentlemen got a tongue lashing from Henry Waxman (D-Cal.), the chairman of the House Subcommittee on Investigations recently, but otherwise walked away free men with nest eggs most people on this planet will never even dream of having.

In contrast, Insull not only lost everything he owned because he used his worldly goods as collateral for bank loans to prop up his companies in the early 1930s, was extradited (some say kidnapped) from Turkey and tried for fraud three separate times. He was acquitted in each trial. Jurors could plainly see he went down with his ship. No such corporate captains seem to command boardrooms these days.

The one blessing that came out of Insull’s public demise was the nucleus of New Deal investor protections. When I read the original marked-up speech in which FDR both denounced the utilities magnate and proposed what could be done about averting future chicanery, my hands trembled. Here was a detailed conception of how everyone could be protected, securities markets policed and excessive corporate control curbed. Upon the ashes of Insull’s empire, new laws sprang forth that forced disclosure and reined in abuses. The lion’s share of those laws is still with us today.

While there’s much historical rear-view-mirror criticism of what FDR really accomplished with the New Deal, at least there was a comprehensive plan of action articulated from the White House. In the absence of a rogue’s gallery of scapegoats – it would be a very crowded room at this point – something like the New Deal would be welcome. A Fair Deal for future mortgage borrowers, brokers, bankers and Wall Street intermediaries is needed.

Markets work best when there’s a cop on the beat and aren’t supervised by Inspector Clouseau. Disclosure works best when all parties understand what they’re buying, the risks involved and how much it’s going to cost them over time. There’s no need to burn anyone in effigy, just fix the system – the real culprit in this whole mess.

John F. Wasik
Author of The Merchant of Power: Samuel Insull, Thomas Edison and the Invention of the Modern Metropolis and six books on investing.


Mark said...

John, nice piece. As to your comment on the culprit is the system, someone hired Inspector Clouseau. More to the point, someone gave his coworkers the pink slip.

I've watched the Savings and Loan crisis created by deregulation. I've watched the junk bond issues. I'm now witnessing the mortgage crisis. Like the all of the others, this last issue has been years in the making and very predictable.

We need some sensible regulations and some people to enforce them.


Mark Biersdorf
Grayslake, IL

Smith Mill Creek Notes said...

Where can I find the text of that Portland speech?

I can imagine how amazing it must have been to hold the marked up draft.