Wednesday, September 12, 2012
Kovacevich: "If We Did Not Have Fannie and Freddie, This Crisis Would Never Have Occured"
Wells Fargo's ceo Dick Kovacevich talks about the causes of the financial crisis on CNBC's Squawk Box, September 12, 2012
The following transcript has not been checked for accuracy.
right now, though, more from our guest host today, dick kovacevich who is the former chairman and ceo of wells fargo. when we were talking a little bit ago, you were talking about how the financial crisis was caused, in your view, this was eight banks, 12 s & loans, citi, you could go back to those and go to the heads of those at that time. you think there were real problems happening. yeah, 11 and 12 s & ls, and one commercial bank, the rest were commercial banks. i think it was greed. they had to know that this stuff was not good. we went from -- there's always been subprime mortgages. we went from about 10% of the mortgage market to at the peak to 50% of the mortgage market being subprime lending. and this is no doc, low doc stated income, an open invitation for fraud. we know that mortgage brokers made up employment reports and their salaries and whether they were first-time homeowners and so forth and so on. all made up. why didn't we ever see any charges that came of out of this? for the life of me, i don't understand. i think that some people knew what they were doing and that it was bad and that they should be does it go to the top? well, i -- all -- i believe -- i don't know the top of the firm they thought they were doing something criminal. but they had to know that they were selling stuff that they would never want to buy. some firms were shorting the very things they were selling. where the aig thing came in. you said it was ancillary. but if you could get s&p to sign off on an aaa rating because you had the credit default, then it gave you cover. you're hitting right on it, joe. there's always been greed and malfeasance on wall street, but how did this get so big? the reason is there were five safety valves that usually keeps things under control that all failed. the first one was the credit rating agency. how could credit rating agencies in any set of circumstances rate some of this stuff aaa? it is inconceivable if you know anything about the mortgage business. if you rated something aaa, german savings banks would buy it and so on. right. do we get to barney frank in any of this? so the second one is fannie and freddie. fannie and freddie. 70% of all of these subprime mortgages were guaranteed -- subprime mortgages, alt-a, exotic mortgages by freddie, fannie, or another government agency. there is no way that anybody would've bought this stuff if it wasn't guaranteed implied of the government. if we would not have had fannie and freddie, this crisis would've never occurred. i see all kinds of people said fannie and freddie was a small player, they got in late. i'm with you. 70% of these things were fannie and freddie? they were underwritten by fannie and freddie. guaranteed. but what's important here to understand is that should never have happened. people -- i personally have been warning about the fannie and freddie blowing up for 20 years. and i've told barney frank a hundred times, i've written him letters and so on. every administration including the clinton administration. as he said in his book, he thought the third rail was social security. he said, no, i learned it was fannie and freddie. what about -- democrats in congress were a strong supporter of -- so democrats -- didn't w try to rein it in? i want to repeat, i don't believe -- if the credit rating agency would have been doing its job, if fannie and freddie had been doing their job -- you've got three more to go. the sec, who is the regulator for the credit ratings? the sec, who is the regulators of the investment banks that allowed the liquidity issues? and also, in charge, and we did mark to market accounting when the market wasn't functioning. right. why would anyone with a brain over -- well, you already said it was the government agency. so it wasn't anyone with a -- and who was fourth? the fourth were regulators. you know. which -- let's take an example. so wells fargo was the number one origior of home mortgages in the country. we were losing market share. the regulators knew that. so why wouldn't they say, why aren't you participating in the subprime business? what do you know? john paulson knew it didn't work. where were the regulators? who is this? the state regulators who had the brokers. they were the regulators of the brokers. mortgage brokers. 70% of all subprime originations by both mortgage brokers, there was absolute fraud by those people. but, dick, what a great -- when i was a stockbroker, we tried to get people to send us money. think if you can call people and say i'm sending you money with no doc, no address, and take a percentage of what i'm sending. a welcome invitation to fraud. i want to go back -- and 40%, at the peak of the market, 40% of these originations never made a single payment. 40%? 40%. so we had no checks -- all those checks and balances didn't work. isn't the new york times to blame here somewhere? can you throw them in at number six? now we do have to go. the point i'm trying to make -- that's the only time -- the point i'm trying to make, if we have the failure of all of our safety valves and check and balances, it's better to say that we don't have any. than to try to -- when they're ineffective. we're going to pick really smart people. when was the last time you heard anyone talk about those five organizations as the real cause -- we'll get her in and then we'll be fine.
This transcript is generated by automated closed captioning, has not been edited, and may not be entirely accurate.