election 2012 special event. >> tonight, part 1, "money, power and wall street." >> the clouds are still hanging over the global economy, and they're still filled with risk. >> inside the epic story of te global financial crisis. >> here we are, three years plus after, and very little has changed. >> where we are now... >> wall street got bailed out, and main street didn't. >> and how we got here. >> let's put together a portfolio of credit risk. >> now the banks have taken these ideas and applied them in ways that they'd never expected. >> once the seed was planted, there wasn't any stopping it.
>> $36 billion in bonuses this year. >> this kind of cult of more, more, more, grow, grow, grow. >> the economy is melting, the bush administration is leaving. obama gets a real glimpse of the future. disaster is coming. >> there's real panic in the marketplace. >> you may have just made the decision that destroyed the world. >> these banks transfer risk across the atlantic, outside the purview of american regulators. >> they turn into a frankenstein monster. >> occupy everything! >> in an election year... >> wall street got away with bank robbery. >> is the global financial system any safer? >> this crisis really never ended. >> tonight, part 1, "money, power and wall street."
>> frontline is made possible by contributions to your pbs station from viewers like you. thank you. and by the corporation for public broadcasting. major funding is provided by the john d. and catherine t. macarthur foundation, committed to building a more just, verdant, and peaceful world. and by reva and david logan, committed to investigative journalism as the guardian of the public interest. additional funding is provided by the park foundation, dedicated to heightening public awareness of critil issues. and by tfrontline journalism fund, supporting investigative reporting and enterprise journalism.
>> narrator: every day tens of thousands of workers make their way to wall street. they work for banks, brokerages, hedge funds, insurance companies and mortgage lenders. it is the largest single sector of the american economy-- an industry that is almost double the size of america's manufacturing sector; a business with enormous power and global reach. it is the industry that led america and the world into its worst economic crisis since the great depression. the banks say they exist to
create wealth-- holding in trust our collective worth, promising to invest the trillions of dollars that stream in from businesses, pension funds and savings accounts that belong to all of us. one morning in the fall of 2011, bankers arriving in lower manhattan were caught by surprise. >> this is what democracy looks like. >> the banks got bailed out, we got sold out! >> on the sidewalk. must go on the sidewalk. >> narrator: the recession had destroyed $11 trillion of americans' net worth. a recovery seemed far off. occupy wall street wanted bankers held responsible. >> most americans think, and with good reason, that wall street got bailed out and main street didn't. we have very high unemployment. we lost 8.5 million jobs in the recession. people's houses aren't worth what they paid for them. a lot of 'em don't have jobs.
their kids are graduating from college and are moving back in. >> this is what democracy looks like. we got sold out! >> narrator: some protestors are calling for bankers to be prosecuted. >> it is pretty clear, actually, that there was massive illegality going on. and if somebody with subpoena power was intent on prosecuting that, i don't think there's really much doubt that they would be quite successful in criminal prosecutions. >> we are the 99%. we are the 99%. >> narrator: in a matter of weeks, occupy demonstrations spread to scores of cities across america and the world calling for radical changes in the banking system. >> we are the 99 percent. >> narrator: bankers responded by saying that the answer is to move on and get back to business. >> some of our companies made a series of bad mistakes. and-and-and we all paid for 'em including... and-and it lead to
the economic crisis. >> martin smith: but what makes people upset is that... i mean, you know, a lot of the people that are on the streets demonstrating, occupy wall street, is that the economy hasn't recovered but banks have. >> if you want a stronger economy you have to have financial services companies that are safe, and sound, and able to lend and able to finance their customers. now if you wanna have a recession then go ahead and- and-and hammer the banks. and, you know, make sure that they're... that they fail. because then you'll have another recession. >> do you understand why they're angry? do you have any comment? mr. blankfein, can we ask you a question, sir? can you give the american people an accounting of how you spent their money? do you understand why it is that they are angry at bankers? do you have any regrets about the way you spent the taxpayers money? >> absolutely not. >> narrator: since the meltdown of 2008, there have been dozens of hearings. >> and we regret that people have lost money. and whatever we did, whatever
the standards of the time were, it didn't work out well. >> i would like to ask your opinion of the role that over- the-counter derivatives played... >> narrator: many questions have been asked... >> ...in contributing to the financial crisis. >> narrator: ...but there have been few satisfying answers. >> what goes on at wall street and exactly what caused the crisis and how did we get where we are, it's difficult to understand even for professionals, >> i'm not sure i understand that point. maybe you could elaborate. >> well, i think it's, in many ways it is very simple. i think our regulators and the industry have to focus on complexity. >> but at the end of the day, people usually have a pretty good ability to tell when something's wrong. >> somehow we just missed that home prices don't go up forever. >> what is a synthetic cdo? >> a cdo is a pool of assets... >> i think finance may have gotten too complicated for anyone to understand, >> that are pooled together and
then can be sliced. in a synthetic you pool reference securities that are indexed to specific more... pools of mortgages. >> and that the managers of these large financial institutions in some ways have been given an impossible task that they won't be able to comprehend what it is their institutions are doing. and that is really, really scary. >> you created the mess we're in. and now you're saying, "sorry. trust us." you created cdos, you created credit default swaps that never existed a few years ago. who was the brilliant person who came and said, "let's do credit default swaps"? find him. fire him. >> narrator: it's hard to pinpoint the origins of america's financial crisis. but one weekend at this resort in boca raton, florida, is a good place to start. assembled here in june 1994 were
a group of young bankers from j.p. morgan. at the time it all seemed innocent enough. >> boca raton was a gathering of people that were part of the global derivative group at j.p. morgan, in part as a celebration, in part as an opportunity to relax. but perhaps much more importantly, as an opportunity to get creative, innovative people together in a room to discuss a whole variety of different topics. >> and since they were young, mostly in their 20s, and since there was plenty of money floating around and they were full of high spirits, they did what any young bunch of kids would do and they got drunk, they had parties, they threw each other in pools-- you know this is the normal stuff that happens at conferences. >> yes, i went into the pool fully clothed, as did my boss. some people drank, some people didn't. and i'm happy to say that, like, most people stayed reasonably
sober. >> narrator: they played hard but they also worked hard. they were striving to address an age-old problem in banking: how to reduce risk. >> the defining problem was that banks were unable to adequately deal with their own credit risks. >> we're thinking about how to manage risk. we were thoughtful and deliberate and careful. we had a responsibility not just to make a profit for the shareholders, but to look after the financial system as a whole. >> narrator: over two days of meetings, they looked at whether they could find a way to make their loans less risky. the first journalist to tell the full story was gillian tett. >> they began to look for ways to enable financial institutions to pass risk between them. one way to do that was to sell loans. another way, though, was to separate out the risk of a loan
going bad from the loan itself. and out of that came this drive to develop credit default swaps. (shouting) >> narrator: credit default swaps, a kind of derivative that insures a loan against default. this was a very new concept. traditionally derivatives were a way to bet on the future value of something. for hundreds of years, farmers have traded derivatives to protect themselves against fluctuating crop prices. it is this type of derivative that has been traded on the commodities exchange in chicago, along with the futures of fuels, currencies and precious metals. in boca raton, the j.p. morgan team realized that they could use credit derivatives to trade their loan risks. >> bankers borrowed one set of ideas that had been developed in the commodities market and applied it to loans for the first time. this idea was essentially
created under the banner of making the financial system safer. >> narrator: the first big credit default swap was engineered by blythe masters and involved exxon. >> exxon was the client at the bank and we had credit exposure associated with that relationship. >> the exxon valdspewed almost 11 million gallons of oil into prince william sound. >> narrator: in the wake of the exxon valdez oil spill and a rash of lawsuits, >> a civil trial... >> returned a five-count indictment... >> narrator: exxon took out a multi-billion dollar letter of credit with j.p. morgan. >> a letter of credit creates credit risk. if exxon were to fail on their obligations, then j. p. morgan would have to step in and make good on those obligations on their behalf. it was a large amount of exposure, and there was a significant amount of risk associated with that. >> narrator: and that risk is a big drain on a bank. >> every time a bank makes a loan, under banking regulations,
they're required to set aside certain reserves of capital for the loan. so j.p. morgan, when they made the loan to exxon, would have had to set aside some capital. >> j.p. morgan has to hold certain capital relative to the size of that loan in the event the loan is not paid off at 100% as you expect. well, of course if you don't have to do that and you're a bank, you'd prefer not to do that. >> smith: because then you can finance more freely, you can take on more debt? >> right. >> narrator: so masters started looking at who could take on their loan risk and free up j.p. morgan's capital. she found a taker in london-- the european bank for reconstruction and development. the ebrd. >> ebrd would receive compensation from j.p. morgan for taking on or assuming credit risk and felt that that was a good risk/reward proposition. and so risk was essentially dispersed.
and why did j.p. morgan do that? because we wanted to free up our capacity to do more business. >> narrator: this was a major financial innovation. credit derivatives made it possible for a bank to skirt capital requirements. >> and that's what actually happened. is the amount of capital that banks had to hold got less. and so banks became able to create more and more credit. they could make more loans. >> the innovative element of swaps is that they allow companies, financial institutions, governments, to shed the risks that they don't want to take and take on other risks that they would prefer to be exposed to. >> narrator: the exxon deal was just the beginning. demonstrating that risk could be offloaded and capital freed up. j.p. morgan had struck gold. in 1998, they decided to ramp up their credit derivatives operation. that year, another young banker joined the team, terri duhon.
>> part of my job was to come in as a trader and to build a credit derivative trading book, including all the risk management around the more exotic products. that was what i was brought in to do. >> narrator: previously j.p. morgan had written credit swaps on single companies like exxon. duhon was asked to write swaps on bundles of debt. >> the idea was let's put together a portfolio of credit risk. a portfolio of names. >> narrator: her first trade was a credit default swap on 306 corporate names on j.p. morgan's books. >> and that list of 306 entities, they were very highly rated. they had very low credit risk. >> smith: and the credit default swap was ensuring j.p. morgan against default by those 306 entities. >> that's correct. >> smith: many of them fortune 500 companies or other... >> it would have been your... some of your most well-known household names. and so we were giving investors an opportunity to, in effect,
invest in our loan portfolio. >> j.p. morgan did a lot of work, did a lot of due diligence to assemble this portfolio of loans. and you can get it in one easy, bite-size piece. >> narrator: and the bank facilitated this by slicing up the portfolio into different risk levels, or tranches. investors could choose how much risk they were willing to take. >> different investors wanted different levels of risk. there were some investors that wanted to earn a big return on really risky stuff. and there were some investors that wanted to earn a little return on stuff that wasn't risky at all. >> narrator: from there, the bank looked to expand their business even further. >> so along comes this idea-- what if we could create a market where people were able to buy and sell freely, independently of the companies themselves, the risk associated with lending to those companies. >> narrator: and so they began selling derivatives that were simply bets on any and all portfolios, whether the bank
owned them or not. these products came to be known as synthetic collateralized debt obligations-- synthetic cdos. >> there were investors who were able to invest in some entities that they had not had access to before. >> smith: by buying a credit default swap. >> by investing in a credit default swap because it was a name that they hadn't previously had access to. so there was a lot of... a lot of very positive reinforcement of the market. and it just grew. it grew very naturally. once the seed was planted there wasn't any stopping it. >> narrator: it was the beginning of an unfettered brave new world of banking. >> smith: this was pretty new stuff. >> this was... (laughs) this was incredibly new stuff. it was amazing. it was clearly a product that was in need. we had identified a need. >> narrator: most of the members of the global derivatives group at j.p. morgan were in their 20s, including masters and
duhon, but with the creation of the credit default swap market, they had made banking history. >> what in the long run this all meant was that credit, which is a vital part of the lifeblood of any economy, the global economy, became a more readily available asset. and the thinking was that that would be an unambiguously positive thing. credit helps drive growth, helps companies deploy capital, helps employment, et cetera. it wasn't any longer just an idea in a room in florida, it was the creation of an entire marketplace. >> narrator: risk could now be easily traded. it fueled a worldwide credit boom. soon other banks got excited about the money to be made
writing credit derivatives. paul leblanc was a derivative salesman at morgan stanley who remembers the pressure to get more deals done. >> the volume of transactions was just exploding. i mean, i used to know all the statistics, because they used to talk about it every meeting, how this is a growing market. you have to get your customers involved. they can make money. we can make money. it was a massively important sector for us to focus on, derivatives. >> narrator: and importantly it was a private market-- unregulated and out of view. >> see, unlike an exchange-traded market where all the banks can see all the positions there's no public market for these derivatives. you can't look in the newspapers and get a price for them. these are all private, off-exchange markets. and nobody else in the market knows what's going on. >> narrator: and because this
market was opaque, the spreads-- the difference between what banks could charge for derivatives and what it cost to provide them-- could be huge. >> smith: how much were these things making for the bankers that were selling them? >> the spreads on derivatives are several times larger than on comparable cash securities, just as a general rule. and that's why the banks trade them. >> smith: cash securities being those that are... >> equities, bonds. >> smith: well paint some picture of that and the kind of money that people were making. >> the best reference that you could give is that if you look at, say, the spread that a bank might earn doing an ipo for facebook, they're gonna maybe make one percent to bring out that ipo, very hot ipo. if you were doing the same-sized deal in a derivative security, you might make ten times the fee. >> and the basic business that they created was immensely profitable. but there's a problem with all of this. most people in finance assume
risk can be eliminated; but all you can do is to move it around from one party to another party. >> narrator: there was growing concern in washington. >> we are moving towards greater risk. we must do something to address the regulation of hedge funds and especially derivatives in this country-- $33 trillion, a substantial amount of it held by the 25 largest banks in this country, a substantial amount being traded in proprietary accounts of those banks. that kind of risk overhanging the financial institutions of this country one day, with a thud, will wake everyone up. >> narrator: proposals circulated to rein in the banks and to regulate derivatives. >> what are you trying to protect? >> we're trying to protect the money of the american public, which is at risk in these markets.
>> narrator: the head of the commodity futures trading commission, brooksley born, led the charge. >> we are the regulator which has been given the authority to oversee the major derivatives markets. >> brooksley born was absolutely right because what she said is, "if you don't have transparency and regulation of derivatives, the risk is gonna build up and they're gonna lead to a financial crisis that's gonna cause massive taxpayer bailouts." >> narrator: the banks lobbied hard for no derivative regulation. >> the banks didn't want anyone to know how much risk they were taking on. they didn't want to have to quantify it on their balance sheet. they wanted to be able to push it off and hide it, and that was why they lobbied so hard to make sure that swaps and derivatives would be treated differently from other kinds of financial products. >> narrator: others wanted them to be regulated like insurance. >> one of the most heavily regulated products in the country are insurance products, for all the obvious reasons.
if you're gonna... if you're gonna write insurance, you have to have enough money to pay off that insurance. >> smith: but if you write a credit default swap, you don't have to have that same amount of money on hand? >> or anything else, including, importantly, no disclosure. >> smith: so you're saying it's a kind of under-the-table insurance agreement that avoids regulation? >> it's an insurance product designed not to be regulated as an insurance product and designed to avoid regulation at all. and one thing we do know is that when a product of any type is designed with minimal regulation, capital and activity moves into that area. and it expands dramatically. >> regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. >> narrator: the chairman of the fed, alan greenspan, sided with the banks. >> alan greenspan was coming from a very libertarian tradition. keep your hands off everything. the markets will sort themselves out. and if there's a problem, then
we'll clean up afterwards. and now that really was the way the federal reserve operated under his leadership for almost 20 years. >> narrator: on capitol hill, supporters of bank deregulation made urgent, stark pleas. >> the future of america's dominance as the financial center of the world is at stake. >> narrator: before them was legislation to lift limits on how banks could do business. >> ..if we didn't pass this bill, we could find london or frankfurt or shanghai becoming the financial capital of the world. >> this bill is going to make america more competitive on the world market and that's important... >> narrator: and legislation to prevent oversight of credit derivatives. >> ...on high-paying jobs, not just on wall street in new york city, but it affects every business in america and it benefits every consumer in america. and we do it by repealing glass-steagall.
>> narrator: the campaign to roll back glass-steagall, a depression-era set of reforms was led by the country's biggest bank, citicorp. >> they felt it was in their way and persuaded lawmakers, both democratic and publican, that glass-steagall should be repealed. it also symbolized when everything really started to go wrong. >> it's the most important example of our efforts here in washington to maximize the possibilities of the new information age global economy. >> narrator: in the end, banks would get larger and derivatives would remain in the shadows. >> the derivatives market went into darkness, almost no transparency and no regulation. and what you see is this explosion in the growth of derivatives in the united states and throughout the world.
>> we're only sitting on a couple of mill... >> narrator: the banks had won the day. credit default swaps would now be introduced to new markets. >> the next application of this same technology was to portfolios of consumer credit risk, and in particular mortgage-related credit risk. >> narrator: and the higher the risk, the better. >> what everyone is trying to create is something that has a high rating, and a high yield. that's the holy grail. that's the goal, is to mix together assets in some way so that you come out with a triple a, and a big return. >> narrator: and so wall street discovered the rewards of funding the american dream. just as they had bundled corporate loans, bankers now
bundled mortgages. >> you would buy these big pools of mortgages, and these credit default swaps enabled you to bundle all this stuff together, bring it in house, in order to get it ready to put through the sausage-making machine and create these securities. >> narrator: bankers spread their investing dollars across the country, but especially in states seeing historic levels of population growth. places like florida, nevada, california... and here, in georgia. >> well, atlanta was one of the hottest markets in the country, the atlanta region. >> narrator: roy barnes is the former governor of georgia. >> georgia was the fourth- fastest-growing state at the turn of this last century and the fastest growing state east of the mississippi. so it was a hot market to start with. >> i put my house on the market on tuesday. and it was gone thursday.
>> narrator: elected in 1998, barnes is renowned for having taken on wall street over subprime lending-- a market the street had traditionally avoided. >> subprime lending has been around for a long time and is supposed to be lending done to people whose credit is inferior. >> and in the '80s there was no place for subprime. nobody wanted it. the banks wouldn't buy it because there was a higher risk. >> city mortgage, may i help you? >> i've been having trouble with my credit. >> that's no problem. we'll give you the best rate possible. >> the subprime market was originally a niche market. originally it was not the major banks. it was the mortgage brokers who were specialists in this market. >> subprime loans in atlanta
jumped by more than 500% during a five-year period, >> what really changed the appetite for subprime mortgages was you could securitize and you could sell it on wall street. they do it in tranches, and then they wrap it up so they could be packaged together and have an overall higher yield. >> nearly half of all new single family home construction is in the south, now more than 50,000 a month. >> and, of course, moody's says triple a. so it was just a feeding frenzy. i mean, it was just an absolute feeding frenzy for subprime mortgages. >> with the economy strong, homebuyers are willing and able to spend double what they did just two decades ago.
>> and you could just about drive by a bank and they'd throw a loan paper in your car as you passed by. became very loose. became very loose. >> narrator: but what big banks on wall street did not or would not see was what was happening on the ground around the u.s.-- a wave of lending abuses. >> it's a phrase you're likely to hear in the future: predatory lending. >> we trusted mortgage companies... >> we say that we were swindled... >> ...the situation have caused me to go into the state of bankruptcy. >> this is what you call robbing somebody without a gun. >> the wild west experience in home mortgages was well underway. >> 41-year-old hessiemay hector, mother of three, agreed to a second mortgage at 27.5%. >> we were creating mortgages that we had never seen before.
and they were being created faster and faster. >> the interest rate on these loans was as high as 42%. >> we saw borrowers given loans that were greater than the value of their home. home buyers were getting loans that had no income. the borrower-- particularly the elderly or the low income-- had no clue as to what they signed. there was a tremendous growth of mortgages that we knew made no sense financially. >> when you have a high interest rate, then you have high points, then you have pre-payment penalties. when you have balloon payments, when you have adjustable-rate mortgages and when you layer those bad practices on top of a high interest rate, it becomes predatory. >> black homeowners in atlanta have become such frequent targets of unscrupulous lenders that counselors regularly hold community meetings to issue warnings. >> you end up with monthly payments that you can't afford. >> and why did they sell them to people that they were not good
for? they did it because th could. >> we've got to fight, fight, fight, fight! >> narrator: housing advocates around the country took on predatory lenders. but one of the fiercest fights was here in georgia, over what was called the georgia fair lending act. >> but we don't need rhetoric... >> narrator: the bill was sponsored by state senator vincent fort... >> we need action, now. >> people are tricked into owing more money that they could ever dream.... >> narrator: ...and backed by governor roy barnes. >> ...talked into believing there's a way out. >> governor barnes and others are making a last ditch effort... >> narrator: the bill targeted high-cost loans and predatory lenders with a series of rules and prohibitions. >> it's up right now on the house floor, a governor's bill to crack down on so-called... >> narrator: the mortgage lenders and the banks struck back. >> none of these people have a clue of what's going on. nobody here understands the business and they didn't let us speak. >> you would have thought i had recommended that we repeal the plan of salvation. and why were they so opposed to
it? money. money. >> this bill will cripple the mortgage business, it's gonna cripple real estate sales, it's gonna absolutely devastate the home market in georgia. i can guarantee you. >> there were threats that the residents in georgia wouldn't be able to get mortgages any more, because investors would not buy the mortgages in georgia. and if that were true, no bank would create a mortgage in georgia. >> narrator: despite the efforts of the mortgage lobby, barnes and fort got the bill passed in april 2002. >> georgia now has the toughest predatory lending law in the nation. >> narrator: the mortgage lobby feared that similar legislation could pass in other markets like california. they opposed barnes' re-election. they funded his challenger and lobbied to rescind the law. >> right after governor barnes' defeat in november, one of the top legislative priorities for the new governor and the new
legislature was to gut the georgia fair lending act. i think it was about two weeks into the new legislative session and it was gutted. >> narrator: but for a seven- month period, predatory lending in georgia declined. it may have been the last chance to slow the housing boom. >> i would like to sit up here and tell you that i was like nostradamus, that i saw that the world was going to come to an end because of all this. but i could never have foreseen the difficulty that existed. never have... could i have foreseen that. >> i think we still would have seen an unrealistic bubble. but it wouldn't have gone up as fast and it wouldn't have collapsed as fast. we would not have been in as deep a hole today as we are if we hadn't had these funny mortgage products. >> no let up in the housing boom, which is good for the economy. homes were selling last month
at a record clip, the main reason low mortgage rates... >> narrator: the big banks continued to package and sell more mortgage portfolios. and more and more of these cdos contained high-risk subprime debt. to keep the rating agencies on board, more credit default swaps were sold. >> let's say i have a pool of mortgages-- i have a thousand mortgages from california and i want to package these up. but i decide, "well, some of these mortgages may be subprime and i want to buy a little bit of credit default insurance." >> smith: and by doing that, you improve the profile... >> in theory, yes. >> smith: ...of your cdo... >> that's right. >> smith: ...so that you can sell it better. >> i could go get a rating for it, too. i could go to moody's and say, "look, i have laid off two percent of the risk on this portfolio. shouldn't i get a better rating than if i just sold the pool as it was?" >> smith: so you take a lot of crap... >> that's right. >> smith: ...a lot of mortgages that are... >> hideous crap. >> smith: but you insure it and the credit agency says, "hey, that's a good idea."
>> yes. yes. >> and it seems that in the housing market many investors actually began to take more risks precisely because they thought th they had bought protection with credit default swaps. >> new home sales jumped 13% over a year ago, while existing home sales rose 4.5%... >> narrator: the team at j.p. morgan was also dabbling in mortgage debt but they weren't sure it made good sense. >> we traded mortgages. we had some mortgages on our books. we certainly understood the mortgage-backed security market. but we had a lot of trouble getting comfortable with that risk. the big hang-up for us was data. we had years and years of historical data about how corporates performed during business cycles. but we didn't have that much data about how retail mortgages performed during different
business cycles. >> we knew how much money people said they were making. we saw that ubs and merrill lynch had securitized products earnings that were growing faster than ours. and we asked ourselves the question, "what are we doing wrong? what are we missing? have we not figured out how to lay off some of this risk? and honestly, we couldn't figure it out. what we never imagined was that those firms weren't doing anything at all. they were just taking the risk and sitting with it. >> the first wave of j.p. morgan bankers who had developed these original ideas in the 1990s, when they saw what was starting to happen-- essentially other banks were taking these ideas and applying them in ways that they had never expected-- some of them began to get very worried. >> we were just about to say "done" on a transaction. we had a global phone call and we were discussing the risk that we were about to do and we had discussed it over and over and over.
and finally someone on that phone call said, "i'm nervous." >> twice as many home buyers are getting adjustable mortgages. >> we almost had stopped thinking and stopped reassessing the risk as we went along. and suddenly we found ourselves with a product that was vastly different from where we started. and every little tweak along the way we had all said, "oh, that's okay. that's okay. that's okay." until suddenly we all looked up and said, "hang on, it's not okay." >> the world is still living with a lot of big, unresolved problems. >> narrator: other banks were not so cautious. they aggressively sold subprime cdos to customers all over the world. london became a second beachhead for their trading and sales operations. >> the stock market's on the rise and economic statistics... >> the city of london actually did yeomen's service in creating some of the nastier structures. they did this offshore. these were not sec-registered
deals. these were all private placements. so they were going through the legal loopholes. (bells chiming) >> narrator: a group of state-run banks in germany known as landesbanks were among the biggest customers. desiree fixler, who worked at j.p. morgan, says she was amazed by these banks' appetite for subprime mortgages. >> you knew that a core group of banks in germany would buy anything. we strongly believed they were very naïve. we were amazed that they would buy this. it was... i mean, every single person, every salesperson, was envious of that particular salesperson that was able to cover the landesbanks and ikb because you were in one of the hottest seats, globally. you were gonna generate tremendous profit margin. they were big buyers. >> ikb was very convinced that they were one of the strongest bank in that area. they were running around telling
people how good they are in investing. >> narrator: german banking giant deutsche bank did several deals with ikb. >> smith: did you think, at the time, that your products were helping ikb, that these were good things for them to buy? >> yeah, absolutely. otherwise we wouldn't have manufactured these products and ld it to them. >> smith: so you were bullish on subprime mortgages in the u.s. >> we were bullish on the mortgage market in general, and subprime, which was a element of it. we were not overly aggressive but we were a part of that market, absolutely. >> americans are buying real estate in record numbers. that demand... >> narrator: by the end 2005 the total outstanding value of credit default swaps around the world was measured in trillions of dollars and was doubling every year. >> smith: did top management at j.p. morgan understand credit derivatives? >> yes, they did. absolutely they did.
>> smith: did they at other banks? >> no. not all other banks. certainly not. >> smith: did the regulators understand them? >> i don't think the regulators understood. i don't think the credit ratings agencies, the bankers or the regulators fully understood all of the kinds of credit instruments that we're talking about. >> smith: in other words, some big banks simply didn't know what they had in terms of risk. >> certainly, they didn't... they didn't know some of the forms of risk that they had. that's exactly right. >> sales were higher than most regions, up more than 40% in the west and northeast... >> narrator: housing prices continued to soar. banks packaged more and more cdos. theoretically, there was no limit. an investor didn't need to own any actual mortgages. so-called synthetic cdos allowed investors to bet many times over on someone else's portfolio of debt. >> it allowed participants-- either buying or selling, so
on either side of the market-- to take their positions without being constrained by the size of the underlying market. >> in synthetic cdos, all you had to do was make a side bet based on what would happen to this group of mortgages and have that be the basis of the cdo. the fact that someone had done it one time wouldn't stop you from doing it again and again and again. >> smith: so how is that different than betting on the outcome of the super bowl? >> or a horse race or a craps table? there's no different at all. >> it's just a pure bet by somebody who has no economic interest in what they're betting on. you're gonna bet on the outcome of the super bowl, you're gonna bet on the outcome of a horse race, or you're at the craps table or you're betting on which way the dice are gonna go. >> i'm pretty confident that the housing market's not going to down at all. it's just going to go up. >> within a decade, you have the most phenomenal machine anybody's ever seen. >> new homes are selling at the second highest rate on record.
>> we are in a housing boom. it's quite strong right now and housing prices are going up at a rapid rate. >> ...profit soared at 93%... >> ...expected to dole out $36 billion in bonuses this year. >> everyone was high-fiving. it seemed to be brilliant. the combination of free markets, innovation and globalization appeared to have delivered this incredibly heady cocktail of tremendous growth. >> top executives will earn as much as $20 to $50 million.,, >> narrator: between 2003 and 2006, dick kovacevich, ceo of wells fargo, remembers attending meetings with bankers and regulators. >> oftentimes what would happen at these meetings is regulators would be there, like chairman bernanke, and there might be, i don't know, 30 to 40 bankers. and they would often go around the room and say, "well, what are you guys seeing out there? what's working? are you concerned about housing?" trying to get input. and when they came to me, i
would say, "this is toxic waste. we're building a bubble. we're not going to like the outcome." >> smith: what did your fellow bankers say to you when you told them that you thought this stuff was toxic? >> well, the ones that were in it said i was wrong. and everything is fine. we don't see any losses occurring in this. but we saw risk all over the place. we didn't even participate in the exotic subprime side of the mortgage because we knew this was absolutely wrong for our customers if we would have done it and would have been wrong for us because we think this thing was going to blow up. >> there's a great set of adages on wall street about where risk will flow. and if you ask people, they're basically split between two camps. one says that risk will flow to the smartest person, the person who best understands it. and the other says that risk will flow to the dumbest person, the person who least understands it.
and at least based on my experience and my understanding of what has been happening in the derivatives market, it's the latter. >> i was amazed at the interest on the part of investors to invest in a product that was highly complex and very risky on top of it. >> smith: so let me get this straight, you were-- you were first to the party. you developed this tranching of stuff. >> that's right. >> smith: and writing credit default swaps on it. but now, everybody else has jumped into the game. >> everybody wants to do it. >> smith: but your team decided to stop? why did so many others keep going, marching towards the cliff? >> the... i mean, there... i... look, very simply, there are certainly some investors, some banks, some borrowers, who are a bit greedier than they should be. >> goldman chief lloyd blankfein will take home $53 million. >> narrator: no one wanted the party to end.
most banks believed housing prices would never go down, let alone crash. >> to imagine losses of that severity required very significant assumptions about the path of the economy, which were just not in people's mind. so it required things like assuming that house prices in the united states fell by 25%. people weren't thinking that way and as long as house prices never fell, then these risks would never come home to roost. and that ultimately was obviously very flawed logic. >> as interest rates rose early this year, home sales slowed and after years of record appreciation, prices are now dropping... >> ...cost of borrowing is going up... >> narrator: the unraveling began in late 2006. >> big trouble for millions of american... >> narrator: when housing prices started to drop, only a very few bankers could see the bubble they were trapped in. >> ...the housing market has turned some mortgages into time bombs.
>> by 2007, 2008, all the smart money knew the game had ended and all the banks tried to effectively repackage what they were stuck with as quickly as possible and get it off their books. but there was second parallel movement which was going on which was all about, "how can we take advantage of it?" >> narrator: one of the wall street banks that took advantage of a declining market was goldman sachs. according to a congressional investigation, the bank created a series of cdos containing toxic subprime and then sold them to customers... >> we at goldman sachs distinguish ourselves by our ability to get things done on behalf of our clients. >> narrator: ...while goldman sachs, using credit default swaps, bet against them. >> they bet against their own clients so when their clients lost money, goldman was making money. goldman has a little slogan that the clients come first. no, they didn't. not in these transactions.
goldman came first, second, and third. they were really, i think, the only major bank which made money when the housing bubble burst. >> narrator: in a settlement with the sec, goldman admitted that some of their marketing materials did not disclose important information, but goldman claimed that their investors were highly sophisticated institutions. one customer was that german landesbank ikb. >> ...anyone associated with the subprime market is going to pay the price. >> even when there was a downturn in the markets, they were still buying. i mean, the market is telling them. it's on the screen. there are headlines everywhere: "danger." but they still wanted to go ahead. >> smith: did you feel there was an obligation on your part to tell them that, "look, wake up, the markets are going down. maybe you should stop buying this crap"? >> those discussions-- the word "crap" wasn't used. but, i mean, those discussions definitely happened.
but they felt that this was just a temporary glitch in an overall bull market. "it will recover; it has to recover." >> narrator: in july 2007, the german bank ikb, stuffed with subprime, was the first bank to fail. it was only a matter of time before the crisis came back to wall street. >> that could hurt the value of homes nationwide. >> we knew that the housing bubble had burst. but we'd been reassured that the problem had been contained. but by the beginning of 2008, it was becoming clear that this was a much, much bigger problem than anybody anticipated. >> there was a broad misperception of the risk in housing prices. thwidespread view that we could have a regional decline in housing prices but never a national decline in housing prices proved to be horribly
wrong. >> ..last week was a difficult time in the mortgage business. there was talk about problems in funds that were invested. >> ...there are people talking about even pulling funds from bear. that's the problem... >> narrator: in new york, banks were trying to unload what they could. but there was confusion. at citigroup they were running in circles. >> one of the incredible things about citigroup we now know was although it was tossing these risks off its balance sheet, those risks came right back, almost like a boomerang. without knowing it, they had set up one business to offload risk, and then completely reversed that business taking those risks back onto its balance sheet. >> it was quite clear to me that a number of really quite large financial institutions had not had the kind of management information systems which allowed them even to know what all their risks were.
>> smith: that was astounding to you. >> it was astounding to me. >> ...the sort of origination of the subprime loans, the creation of the cdos-- that business is gone. all those credit default swaps... >> narrator: it would all come down to those credit default swaps. would they pay off as they were designed to do? >> we have known for generations that banks are susceptible to runs. banks can't function if everybody comes and wants their money at the same moment. >> ...merrill lynch, devastated by losses... >> lehman brothers and the fire sale of merrill lynch... >> narrator: this time it would be a run on an insurance company. aig was on the hook for $440 billion worth of credit default swaps. >> remember an insurance contract is only as good as the credit quality of the insurer. they have to pay you. and if they can't pay you for whatever reason, then this whole process of risk transfer breaks down. >> ...we need to stabilize this
industry. it can spread throughout the economy; it could be a very, very dangerous... >> september 18 of 2008, when... i have a conference of my ceos. and ceos traditionally don't read their blackberrys during meetings. but i kept looking around and noticing that a number of 'em were. and so i turned to one. we recessed, and i said, "you look like the world has ended." and he said, "i think it has." >> ...the enormity of the situation-- a financial nuclear holocaust. some $400-odd billion of credit default swaps... >> another government bailout-- aig securing an $85 billion... >> aig could not conceivably have paid off all of those credit derivatives, because it had misunderstood the risks and did not have what we'd call a balanced book or nearly enough capital to back their losses. >> smith: didn't everybody know that aig was holding a lot of cdss? >> no. there was no disclosure. that's the whole point.
they haven't reported this to anyone else. the other dealers have no idea what's going on. the other banks don't know. nobody knows. the banks turned this market into their own private game. >> it was, in fact, a financial shell game where we were manipulating banking results by moving the risk out through one door but bringing it back into the banking system by another door. the risk was not leaving the banking system. and everybody in the world was connected through these chains of risk. any if part of that chain breaks down because they can't honor the contract, the entire system implodes.
>> narrator: the idea dreamed up by a group of young j.p. morgan bankers at a weekend retreat many years ago was supposed to reduce risk. >> their original idea had been taken and it turned into a frankenstein monster, which they never dreamt would become so big and spin out of control to that degree. >> it was a very scary time. we were in totally new territory and the notion that lehman brothers could be filing for bankruptcy and aig could be at risk of the sameate was absolutely unprecedented. and the implications, thinking through the implications of that, for the health of not just the u.s. economy, but the world-- i mean, it wasn't really conceivable to do that. i couldn't get my mind around it, i know others couldn't. >> we never saw it coming.
we never saw that coming. and i was disappointed. hugely disappointed. i mean i was part of a market that i believed was doing the right thing. and maybe i was idealistic, maybe i was young, maybe i didn't fully appreciate where we were going, but there was a whole system going on, all the way from the borrower of the mortgage, all the way through to the investor. there's a whole system of people who maybe were turning a blind eye. maybe were, you know, just, i don't know, it's--it's frustrating to see, certainly. >> it shouldn't have happened. most of our financial crises in the past is due to some macroeconomic event-- an oil disruption, war. this was caused by a few institutions, about 20, who, in my opinion, lost all
credibility relative to managing their risk. and the sad thing is it should never have happened. the management should have stopped it before it got big, and people are suffering for something that should never have happened. >> narrator: today, the fallout is felt mostly in places that had seen the highest growth, like georgia. ground zero of the subprime crisis: local neighborhoods, city streets. >> cities throughout the united states are seeing a rise in vacant and abandoned properties. and that's where the neighbors feel it. as neighbors we're concerned not so much with the complexities of the subprime mortgage market and derivatives; these things we will hardly ever understand. what we feel on the street is
the fact that the house next to us is vacant, abandoned, partially burned. and we wonder how long it's going to be there, how long we will pay the price for that abandonment. a neighborhood cannot survive long when it has a growing inventory of vacant, abandoned properties. >> narrator: sometimes no one even knows who owns the properties. >> it's hard to know who owns it because it's been sliced and diced so many ways by investors that it could be somebody in ireland who owns it. you have these securitized pools, where investors own pieces of it. the investors are around the world, literally, and so it's just in no-person's land. it's a vacant property, mostly vandalized, and it just sits here, and we can't do anything with it. and the reality is that that plays out across this neighborhood hundreds of times.
>> that house has a loan that is somewhere lost in a huge financial vehicle put together by some young turks on wall street. it's lost in that billion-dollar package. there's nobody assigned to look after it. and there're whole subdivisions like this, by the way, that are just lost in this great momoss. and so it affects main street because wall street was too greedy. the greed ofall street broke main street. >> coming up nextfrontline's four-part investigation of the financial crisis continues. >> concerns about shaky home mortgages are triggering fears of a financial meltdown on wall
street. >> inside washington's strugge to respond to the meltdown. >> the dow tumbled 240 points, while the nasdaq sank 46. >> they were all very afraid of the possibility of a bank failure. they didn't know what it would lead to. >> fears of a global liquidity crisis have intensified today. >> inside the critical decisions... >> the stock market dropped by hundreds of points right... >> the policymakers have sent inconsistent signals, so the marketplace doesn't know what to expect. >> everything freezes, and that's what causes the crisis. >> turmoil in markets around the globe. >> i thought we may be presiding over the second great depression. >> the politics of a bailout. >> they had to throw their principles out the door and save the economy. >> america, you should be outraged about what washington is about to do. >> and the education of a fute president. >> the economy is melting, the bush administration is leaving... >> and all eyes are now on barack obama to turn it around. >> obama gets a real glimpse of
the future. disaster is coming. >> "money, power and wall street" continues right now. >> narrator: it was on a cold march day in 2008 that the fear of a meltdown would become a reality. >> ...are triggering fears of a financial meltdown on wall street. foreclosures rose to record highs. >> narrator: after the real estate bubble burst, it would only be a matter of time before investors would start to lose confidence in wall street's biggest banks. >> it started with news that some bear stearns hedge funds... >> narrator: bear stearns was the first to crack. >> pretty normal morning. and then suddenly around 11:00 there's a tremor.
the stock starts to go down. the cfo of bear starts calling down to his desks, to the repo guys, the bond guys, "anybody hear anything? anybody know anything? what is this?" "yeah, the rumor is that we're running out of cash, and that we might be in trouble." >> ...leading this very sharp rally on wall street with the exception of bear stearns. >> narrator: the rumors swirling around bear were about its massive investments in subprime mortgages-- what would become known as "toxic assets." >> they were big in mortgages. they were big in packaging them and creating securities out of them, buying them. >> narrator: the road to riches for bear was simple-- buy hundreds of thousands of subprime mortgages, then bundle and sell them to investors. but now the party was over. bear was spiraling out of control. >> you've either got liquidity or you don't, so... >> it was nothing short of
surreal. >> those are the kinds of concerns in this market-- concerns of confidence... >> you're watching on cnbc, et cetera. i mean, they are talking about where you work. >> well, the only bank in the red right now, basically bear stearns, although it is dragging the rest of the financial markets down as well. >> narrator: the stock was in free fall, and the cash reserves were shrinking. >> the stock started to go down. more and more people called up and said, "i want my money out or i won't trade with bear stearns." and it just completely unwound. >> narrator: nearly bankrupt, the top brass at bear called wall street super lawyer rodgin cohen. >> it became clear they were having serious funding difficulties, and it had been very clear to me that a investment bank has a very short lifespan after it loses its liquidity. >> narrator: cohen made an emergency call to timothy geithner, the president of the new york federal reserve.
>> geithner understood that it was a vulnerable situation. he said something like, "believe me, i'll be on it," and that was really the phone call. >> narrator: geithner was bear's last chance. >> tim geithner is at the federal reserve bank of new york. it's the epicenter of the financial system. he is supposed to be the fed's frontline general, field marshal in the financial markets. >> he's 47 years old, he looks like he's about 32. >> extremely smart, extremely aware of the stuff, very discreet, controlled. >> narrator: geithner realized he needed to know how bad bear's books looked. he dispatched a swat team of investigators from the federal reserve to bear's headquarters. >> tim geithner is frantically
involved in trying to figure out what's going to happen if bear melts down, and how you need to prevent it from going into free fall and dragging down the rest of the financial sector with it. >> by midnight, by 1:00, 2:00 in the morning, everybody and their mother has teams at bear: morgan, the fed, the sec. and they find out bear is stuffed to the gills with toxic waste. >> narrator: bear was party to complicated financial deals. >> nobody understood how subprime mortgages had proliferated through these things called credit default swaps. and nobody understood how they'd kind of gotten into the blood of the financial system. >> narrator: geithner learned that bear had made credit default swap deals worth trillions of dollars all over wall street and around the world. >> because bear stearns was so indebted to so many other people, their failure to repay their debts,
or pay their debts, would cause a cascade of other failures. >> narrator: geithner saw what central bankers fear most: "systemic risk." bear was frighteningly interconnected with other banks up and down wall street. >> no one knew what would be the ramifications. which other institutions were exposed? which other institutions would suffer runs? >> narrator: bear stearns, geithner concluded, was "too big to fail." a bankruptcy could undermine confidence in every major wall street firm. >> they were all very afraid of the possibility of a bank failure. they didn't know what it would lead to. >> narrator: the precipitous collapse of bear stearns had taken federal regulators almost entirely by surprise. >> what became clear as you look at the record is the extent to which the people who were charged with overseeing our financial
system really didn't have a sense of the risks that were embedded in that system. they didn't see the fundamental rotting in the system that had manifested itself for years. narrator: a year later, phil angelides would chair the financial crisis inquiry commission. in their report, the commission concluded regulators at the federal reserve, the sec and other agencies ignored evidence that wall street was flirting with disaster. >> you would think that the people who were in charge of our financial system would have a grip on the key risks that were in it. and if they did, they would have moved, in a sense, to get a handle on those. they had deliberately turned a blind eye to those problems. >> narrator: for three decades, washington had steadily moved to a hands-off attitude towards wall street. and with little oversight, inside these black boxes, wall street had created a host
of complicated but lucrative financial products. >> we had no regulation. no federal or state public official had any idea what was going on in those markets. it was a dark market. there was no transparency. >> they were making money, and they want to continue making money. it was generating fees. transparency drives profits down, drives down transaction costs. the banks don't want that, because they make their money from transaction costs, and they like lots of non-transparency. >> the story has continued to mushroom, and there are concerns among... >> narrator: now, with bear failing, those dark markets threatened to bring down the american economy. at 4:00 a.m., tim geithner picked up a phone and called the chairman of the federal reserve in washington, ben bernanke. >> ben bernanke is a highly, highly respected scholar,
and not only a scholar of economics, but of the great depression. >> if he weren't chairman of the fed, he'd be top of the list of people you'd be going to for advice and understanding in all this stuff. >> narrator: one of the depression expert's biggest fears was being realized. >> it was clear that this had to be contained. there was no doubt in his mind. he, more than anyone else, appreciated what would happen if it got out of control. >> narrator: bernanke believed that just as in the depression, a lack of confidence in the banks could bring down the entire economy. >> you could see the credit default swap spreads widening. and the market was telling you something was wrong. >> here we are, 90 minutes in, and it looked like it was going to be a big up day. and bear stearns hit $30. two things... that was going around. bear stearns now has market capital... >> narrator: the next morning,
bernanke warned president george w. bush's treasury secretary, hank paulson, of systemic risk to the financial system if bear collapsed. >> paulson was picturing a 1,000-2,000 point drop in the dow that monday, possibly the failure in very short order of a number of other investment banks-- lehman brothers, morgan stanley and so on. >> narrator: paulson thought he knew the markets well. only two years before, he had run bear's largest competitor. >> paulson comes from the great breeds of masters of the universe that have come from wall street. >> henry paulson came from goldman sachs. he was a very powerful wall street figure. >> narrator: at goldman he had overseen the growth of those complicated financial products, and was always a champion of the free market. >> paulson does not have the mentality of a regulator. he has the mentality of an investment banker-- that the market rewards and the market punishes, so you don't need a lot of regulation.
>> narrator: a bailout of bear stearns was not paulson's style, but bernanke and geithner believed it was too big to fail. and by that weekend, options were dwindling. >> it was a gut-check moment. do we feel like we can take the risk of letting it go? they all looked at each other and just said, "i'm not ready to take that risk." >> narrator: they would use $30 billion of government money to avoid a bankruptcy. tim geithner would broker a fire sale of bear stearns to j.p. morgan. >> the federal reserve used powers that it had had, but had lain dormant since the great depression. they basically took $30 billion, went to j.p. morgan and say, "we'll give you $30 billion if you buy this bear stearns, so it doesn't have to go out of business." and they did. >> what the new york fed did was take all the bad stuff off the books of bear stearns and allow j.p. morgan
to purchase the good part of it. it's kind of like if uncle sam had come in and taken all the vinegar and allowed j.p. morgan to have the wine. >> narrator: bailing out a major financial institution in crisis was something tim geithner had seen before. it was taken from a playbook created back in the 1990s-- how to respond to a financial crisis. >> tim geithner, going back even to his days in the clinton administration, he's sort of known as a cool head in a crisis, and in how do you manage a really troubled financial system. >> narrator: in the clinton administration, robert rubin was the treasury secretary, larry summers was his top deputy, and undersecretary tim geithner was always in the room. >> they had this bonding, unifying experience during the clinton administration putting out these various crises, from thailand to japan to indonesia.
geithner was one of the guys who was sort of part of that swat team that understood how to react to a financial crisis. >> narrator: they engineered massive bailouts when american banks were threatened by financial turmoil overseas. working with the international monetary fund, they loaned hundreds of billions in countries like mexico, thailand and south korea. rubin and summers, along with federal reserve chairman alan greenspan, became superstars of the financial world. >> you had this infamous, now, time magazine cover with bob rubin, larry summers and alan greenspan, called "the committee to save the world." and that just sums up the attitude of the times perfectly. >> by the end of the clinton administration, the folks in the treasury-- geithner, summers, rubin-- felt like there was an established playbook for dealing with a financial crisis. the first thing you had to do was come in and flood the banks with money, so that they would keep lending, as difficult as that was to do politically.
>> narrator: it was an approach geithner took with bear stearns-- spending lots of money to respond to a financial crisis. but treasury secretary henry paulson thought geithner's strategy might send a dangerous message. he started publicly reminding wall street of one of the most basic tenets of the free market: moral hazard. >> i'm as aware as anyone is of moral hazard. i am also aware of... >> moral hazard poses the question: if you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake? >> paulson is out in public saying, "it's all on you now. this was a one-time only event. you're on your own now. we did it with bear. but now you're on your own." >> there's news today of a federal bailout for a wall street... >> it's a fire sale for troubled bear stearns... >> narrator: the bailout of bear stearns landed in the middle of an election year.
>> are you fired up? are you ready to go? fired up? >> narrator: barack obama had already made the economy a key issue. >> because we've got eight years of disastrous economic policies. that's what we're going to change when i'm president of the united states of america. >> obama very early realized that things were only going to get worse. and so obama made this decision, "the thing i'm going to run on is that there is a problem in our economy, my opponent doesn't see it, and i can fix it." >> narrator: and right after the bear stearns crisis, he turned his attention to wall street. he had an inside source-- the man in the pink striped tie. >> we met for a little dinner, just him and i. and, you know, i was hook, line and sinker. i felt like here was a guy that could really bring this country together. >> narrator: robert wolf was a wall street power broker-- the chairman of ubs americas,
part of the giant swiss bank. >> from that day on we started talking very, very often. i don't know if it was once a week, three times a week, five times a week, emailing back and forth, but from that time on we started talking about the markets and the economy nonstop. >> narrator: and with wolf's support, obama decided to confront the bankers on their own turf. >> i actually went down to the cooper union speech with him in his car. >> senator barack obama. >> he was talking about the idea of making sure that the ethics of wall street was pure and that we were doing the business that we should be doing. >> thank you very much. thank you. we let the special interests put their thumbs on the economic scales. we've excused and even embraced an ethic of greed. >> the cooper union speech was essentially obama's effort to say to the democratic party
and to the country that he believed that we had to rein in wall street; we had to resume more aggressive regulation of wall street. >> instead of establishing a 21st century regulatory framework, we simply dismantled the old one. in doing so we encouraged... >> narrator: in the audience, wall street's power brokers were paying close attention. >> he was sitting in the heart of the world financial center talking about regulation before we started talking about regulation. >> our free market was never meant to be a free license to take whatever you can get, however you can get it. i would say the reaction wasn't great from wall street. but, you know, to the president's credit, that didn't stop him from laying out what he thought was going to be necessary. >> thank you.
thank you. >> narrator: the campaign continued, but over the next few months the news didn't get any better. >> profits in the banking industry are plunging. >> the jobless rate in america has now soared to 6.1%. >> narrator: the markets were on the edge. >> the dow tumbled 240 points while the nasdaq sank 46. >> narrator: at the white house, president bush decided secretary paulson would handle the crisis. >> this is an extraordinary period for america's economy. >> president bush, who's in the final months of his presidency, was receptive to letting paulson decide the best way to fix the problem. in effect, he said to paulson, "i've got your back. i'm going to get you whatever you need. but you're the front-- you're the frontline general here." >> narrator: paulson hoped the failure of bear stearns was an isolated event. wall street was now on notice, and other banks would have to take care of themselves. >> he was relatively sanguine. and he thought, "well, this is a
one off. they screwed up but, you know, others aren't going to be quite that bad." >> it felt like this was a crisis but not an uncontrollable one. this was something that could be stopped. a finger in the dike would end up working fine. >> narrator: paulson told president bush what was needed now was to rebuild confidence in the economy. bush's speechwriter matt latimer helped craft the message. >> the attitude was to emphasize how good the economy was, how things were improving. we'd have different bullet points and things we'd emphasize in speeches. and over time, some of the bullet points stopped being relevant, or they were actually bad signs, so we took them off e list. so the list of good news kept dwindling down. >> i believe market conditions will continue to improve. i am confident, because our economy is resilient and deep and competitive. and i want americans to be confident as well.
>> narrator: both paulson and bernanke insisted all was well. >> we will work our way through these financial storms. we will work our way through this cyclical movement that we have. and the economy will return to good growth. >> narrator: it became known as the summer of assurances. >> when will the economy turn around? i'm not an economist, but i do believe that we're growing. and i can remember, you know, this press conference here where people yelling "recession this, recession that," as if you're economists. and i'm an optimist, you know? i believe there's a lot of positive things for our economy. >> narrator: but there were strong warnings of what was to come. >> a bullet had been dodged with bear, but i think the more analytical people on wall street recognized that there were still a lot of bullets coming. the prognosis for the near future was that
there were still huge problems. >> narrator: that summer, as the financial crisis became increasingly obvious, there was no decisive action from those in charge. >> that's one of the most striking parts of the story, is that, first of all, how little the people who were in charge of our system knew and/or did in the wake of this oncoming crisis. and secondly, once the evidence was clear that the system itself was shaky and unsound, how there wasn't definitive and strong action to try to curb what was becoming a disaster for the country. >> narrator: when asked why the government did not do more that summer, assistant treasury secretary michele davis said she and paulson believed the government was powerless to prevent the looming crisis. >> the american people expect the federal government to have the authority to prevent a disaster when they can see
it coming. and we don't have that authority. we also all knew it was june, july of an election year. there was not much realistic chance of actually somehow enacting new authorities. so all we could do was look at the authorities we had and try to figure out what we could use. >> these are the people who we charge with the responsibility of monitoring. they're the ones who are supposed to keep out for systemic risk in our country. that's their job every day. why didn't someone stand up and say, "wait a minute, this is a lot bigger than bear stearns"? >> narrator: by the fall, in new york city, on wall street, there was a palpable sense of unease. >> and the number of u.s. banks in danger of failing is rising rapidly. >> narrator: but wall street didn't know where or when the panic would strike next. >> fears of a global liquidity crisis have intensified today,
dropping stock prices. >> ...predict 100 could close by year's end. >> narrator: then it hit. in the crosshairs, the world's fourth largest investment bank: lehman brothers. >> ...true in the case of lehman brothers, shares of which... >> lehman is quaking. they're having to bring in a quarter of a trillion dollars a day, that goes out the next morning, just to survive. >> narrator: back when the mortgage business was becoming the biggest casino on wall street, lehman was one of the highest rollers, betting hundreds of billions of dollars. just like bear stearns, lehman's bets had gone bad, and all over wall street they knew it. >> its stock price dropped 45% tuesday. >> ...percent loss for the lehman brothers, and many, many questions, including... >> they have zero leverage. they have to do something soon, it's obvious. >> narrator: dick fuld ran the company. on wall street they called him "the gorilla." >> it's like you poured a bull into a suit.
he just... he just can't stop being dick fuld. and the whole firm came to be stamped with that. >> narrator: many believed fuld's lehman brothers was too big to fail. and fuld seemed to think neither geithner nor paulson would ever let it go under. >> dick fuld is still believing in the orthodoxy. even though paulson is saying publicly, "you're on your own," he's like, "what, are you kidding? if there's trouble, the government's going to come and take us. they are going to come and do what we need to do, because the world can't live without lehman brothers at the center of the financial system. it'll be a complete nightmare." >> narrator: and fuld believed he had a possible ally in geithner. he was one of their own. he'd brokered the bear deal, and he was a member of a very exclusive club. >> the board of the new york fed is made up of many of the titans of finance. that's really, in a way, the ultimate club on wall street.
they determine who the president of the new york fed is. it's really the ultimate insider's institution. >> dick fuld is on the board. jamie dimon is on the board. tim geithner is a quasi-wall street ceo. you know, he has oversight over them, in some respects. he works with them in other respects. >> narrator: now on phone calls with hank paulson and ben bernanke, geithner argued they might have to follow the bailout playbook. >> geithner tells paulson, "i believe we are going to have to put government money in. and you'll not have credibility if you say we're not going to do it and we are." so we know there is that tension. >> so hank paulson's sitting there. and it turns out that we're having the largest crisis wall street has seen since the great depression. and he's at the center of it. and at this point the question becomes, what does hank paulson do?
>> narrator: paulson was under immense political pressure. >> you had a conservative secretary of the treasury and a conservative administration. there was a lot of right wing criticism over bear stearns. i had the republican members of the committee of financial services wanting to tear into paulson and bernanke for what they did to bear stearns. >> do you really think we can believe exactly what you're saying, secretary paulson? >> i was sort of defending them against their own republican colleagues. you had people saying, "hey, look. this is the market. if you don't let some people go belly up, then you lose the discipline of the market." >> narrator: indeed, moral hazard seemed to be driving paulson's decision. >> at this point, he makes a critical decision because of this issue of moral hazard: that lehman will be allowed to fail. >> it was a very high stakes game of signaling that he was playing. he wanted to show these guys, you know, all his old buddies
on wall street, that they were going to need to step up and do something themselves. >> narrator: friday night, september 12, 2008, after the markets closed, the heads of wall street's largest firms were summoned to the federal reserve bank in new york. this weekend would be a critical moment in the story of the meltdown. >> about 4:00 or 5:00, the various officials from the federal reserve started phoning the bank chiefs, cell phones started going off, and they said, "you need to be down here at 6:00. we want to talk to you." >> i got a phone call about 5:00 saying. "be at the fed at 6:00" that evening. i was in merrill lynch's midtown facilities. and i live in westchester, so i was trying to get out of the city early, because the traffic is always bad on a friday night. i went by myself. and, for the most part, the ceos
of the large investment banks and commercial banks were all there by themselves. >> so everybody converged. at that point, it was just the ceos of the main houses and very senior advisors. >> you had about a dozen different ceos there, and you have in there tim, from the fed. you have henry paulson as the treasury secretary. >> narrator: paulson delivered the message: lehman was in a death spiral, and there would be no government bailout. >> they'd said to us we collectively had to find a solution for this. and this is the important part-- the government was not going to provide any form of assistance. >> narrator: it didn't take long for candidate obama to also hear the news. at the time, he had a secret inside source. >> i was speaking to the senator all along.
when we started talking friday night, he was asking the tough question. >> narrator: ubs chairman robert wolf was stepping out of the meetings to keep obama up to speed. >> he's saying, "barack, this is bad. lehman could go down, but aig is right behind it as well as merrill." he lays it out. >> i was clear that, you know, from my perspective, i think immediately we will see the markets and funding start to dry up, you'll see a lack of liquidity, and we're going to be in a situation of the unknown. >> narrator: the other wall street banks said they were not about to rescue lehman. but paulson was standing firm. there would be no bailout. geithner and bernanke would go along. >> geithner should have been spending the summer of 2008 figuring out what to do if there was a lehman.
and they didn't do that. this is a historic failure. they should not have been in a blackberry crisienvironment in the fall. they're essentially unprepared. >> narrator: by sunday evening, it was over at lehman brothers. the lawyers spent the night preparing the bankruptcy papers. on monday morning, tim geithner began his day working the phones. his logs from the day show eight calls with secretary paulson. the early vibrations from wall street weren't good. >> lehman announcing early this morning it will file for bankruptcy, confirming all those reports... >> it's been particularly unsettling for lehman brothers employees, 25,000 worldwide. >> narrator: paulson headed to the white house to reassure the markets. >> good afternoon, everyone. and i hope you all had an
enjoyable weekend. yeah, yeah. >> the fed and the treasury thought that lehman could go under without causing a major conflagration. and that it would be a big event, but it wouldn't cause a cataclysm. >> but the american people can remain confident in the soundness and the resilience of our financial system. thank you very much. >> narrator: paulson had bet the markets would take care of themselves. he would soon discover he was wrong. >> the stock market dropped by hundreds of points right from the open. >> everything freezes. and that's what causes the crisis. and it really started because lehman brothers went into bankruptcy. >> lehman collapses and there are shockwaves through the world financial system, all around the world. huge panic. >> no bank wants to lend to any other bank, because they're afraid that the other bank won't be able to pay them back.
>> turmoil in markets around the globe. >> why didn't the government save lehman the way that it stepped in... >> narrator: at paulson's office, the telephones lit up. dozens of calls from around the country. >> hank was very nervous. he was getting calls from large manufacturing companies that were struggling because of the credit markets being frozen. the longer it went on, the more trouble the economy was going to be in. >> devastated by losses at mortgage investments, the brokerage is selling itself to bank of america. >> it's a tough day, man. it's a tough day when less is more. >> yeah. >> the system stopped. all forms of payment froze when we got to the depth of the panic. banks wouldn't lend money to each other. the first money market mutual fund in the united states, quote, "broke the buck." commercial paper, one of the most basic instruments in finance, that market failed. >> investors were shaken by lehman's bankruptcy... >> narrator: geithner's logs show 55 phone calls this day. many told him what he already knew-- the decision not to bail out lehman was at the heart of the expanding crisis.
>> the policy makers have sent inconsistent signals. they saved bear. they didn't save lehman. so the marketplace doesn't know what to expect. and there is no doubt that in the wake of lehman, there's real panic in the marketplace. >> i would say if the markets picked up signals that washington was confused, that they read the signals very accurately. i mean, there's no other way to look at it. the only way to look at it was that they were making emergency decisions without a model, without a process, weekend to weekend. >> narrator: paulson had made the tough decision, and was now responsible for the consequences. >> i'm sure that paulson is sitting there, and he doesn't strike me as the most reflective guy necessarily, but he must have been sitting there, everybody was sitting there, saying, "my god, we may be presiding over the second great depression." this is the utter nightmare of an economic policy maker.
you're sitting there, and you may have just made the decision that destroyed the world. absolutely terrifying moment. >> narrator: inside the campaign, barack obama had been hearing about the meltdown in real time, with constant updates from his economic team. >> senator obama was engaged before lehman, but once lehman hit, you know, i think he was all over it thinking in a proactive and prospective way of how this was going to impact the economy. >> narrator: and the candidate had another inside source: hank paulson. >> secretary paulson and the administration are calling then-candidate obama, and they're saying, "look, we think the worlis close to coming to an end and we really need your support."
>> narrator: obama was being briefed about a brand new crisis. aig, the world's largest insurance company, was collapsing. >> when lehman goes bankrupt, all of a sudden aig says, "we're sitting on this huge deficit. we just promised to pay all these people millions and millions of dollars if lehman went bankrupt, assuming that lehman could never possibly go bankrupt. and now lehman has gone bankrupt." >> narrator: obama was told that the failure of aig was far worse than lehman, and threatened a full-scale, worldwide depression. >> aig has problems that make everybody else's problems look like child's play. >> aig does not have the money in the bank to support the commitments it made. >> aig plunging. at one point they were down 70%. >> they faced the hammer of a credit rating agency downgrade. >> narrator: once again geithner and paulson re only now
learning the details about the hidden business dealings of a major wall street institution. >> everyone was having to learn all about aig, you know, in real time, learn about the institution at the same time that they're having to make decisions. and not even having the time to figure out who the big counterparties are, because you're faced with... it's monday night, and if you don't do something in 24 hours, you're going to see the consequences. >> here's this... you know, this mammoth institution that turns out to have an enormous hole in it. and, again, policy makers just come to grips with the extent of the challenges and the problems days before its imminent collapse. >> narrator: geithner realized that if aig went down, the consequences would be even worse than lehman. he argued for another bailout. >> tim geithner thought that if they did not do everything they had to do to save aig, as distasteful as it was, that they would be jeopardizing
the global economy. >> he certainly talks now of having stared into the abyss after lehman and concluded that that was not going to happen again on his watch. >> narrator: paulson, reeling, changed course again. he'd support geithner's rescue of aig. >> they swallow hard, and they do what they have to do. and so much for moral hazard, right? so much for moral hazard, because you can't let aig fail. >> they had to throw their principles out the door and save the economy. and whatever criticism there would be of government intervention was a small price to pay for the deluge that would have occurred if aig had collapsed. >> narrator: it was at this moment that geithner faced a fateful decision. one question was especially sensitive: should he punish the banks that were parties in aig's toxic
deals by making them take a financial hit? on wall street it's call a "haircut." >> there's this very delicate moment at that precise time when geithner and others have the power to say, "okay, we're going to save aig. but the cost to you, goldman sachs, or citi, or anyone else, is that you have to take a haircut. you have to take a discount on your insurance policy. you know that you're going to claim your insurance. but instead of claiming 100% of it, i want you to agree right now you're only going to claim 50% of it." >> narrator: but that's not what geithner decided. the u.s. government, he said, had no choice but to pay off the big banks' claims against aig at full value. >> geithner's entire recovery plan depended on confidence. and if you suddenly start going in and giving haircuts,
people are going to get upset. they're going to be worried. investors are going to pull back right at the time when they needed investors to have enough confidence in these banks to put their money back in. >> narrator: the decision meant billions of dollars would flow to wall street's largest banks. >> if the government hadn't intervened those counterparties would have taken huge losses, so there was some leverage there. you could have at least told them, you know, "you're going to take ten percent." that would have helped. but there was just willingness to kind of throw lots of money at the problem. and i don't... i think we threw more money at the problem than we needed to. absolutely. >> narrator: geithner's bailout put the government on the hook for more than $180 billion. goldman sachs and the other banks would each receive billions. >> stocks plunged again. in the end, the dow plummeted 44points. >> narrator: geithner had orchestrated the aig rescue in only a few days, but it did not stop the meltdown. >> this is def-con 4, whatever.
this was the complete nightmare. by wednesday, you'd basically had a complete shutdown of the world capital market. it's just... no, this is absolute terror. >> narrator: ben bernanke called hank paulson at treasury. >> bernanke basically calls up paulson and says, "there's no endgame in sight that looks good. things only look like they're going to get worse. we have to do something more direct, more direct involvement of government in the banking sector." >> narrator: bernanke wanted paulson to help convince congress to initiate a massive bailout of wall street. >> bernanke says to paulson, first of all he says, "you have to go to congress. we can't do this anymore on a case-by-case basis." at that point, paulson bowed to the inevitable. one thing paulson said to me in an interview is, "when the situation changes, you have to be willing to change with the situation."
>> narrator: on capitol hill, the democratic speaker of the house nancy pelosi knew nothing about bernanke and paulson's plan for a wall street bailout. >> i called him to say, "mr. secretary, can you be to my office tomorrow morning at 9:00 so that you can brief the house democratic leadership?" and he said, "madam speaker, tomorrow morning will be too late." >> narrator: paulson told the speaker that he and bernanke needed to come to capitol hill that afternoon. >> on thursday, late afternoon, they go to nancy pelosi's office. and there's a meeting of the senior legislators from both parties in both house and senate. >> it was obviously a big meeting. i had no idea i was going to hear what i heard. >> the secretary of the treasury paulson and the chairman of the fed camin and kind of dropped a bomb on the meeting.
>> they said they needed the authority to use $700 billion to unstop the credit markets. >> sitting in that room with hank paulson saying to us, in very measured tones, no hyperbole, no excessive adjectives, that unless you act, the financial system of this country and the world will melt down in a matter of days. >> they came in, described a financial meltdown of epic proportions. and when that was finished, the chairman of the fed said, "if we do not act now, we will not have an economy by monday." >> there was literally a pause in that room where the oxygen left. >> and they said to us they needed it by monday. we said, "well, that's not reasonable." >> harry reid, the senate democratic leader, said, "this is the u.s. senate. we can't move that fast."
>> paulson felt that he needed to move swiftly, and almost the economic equivalent of shock and awe. >> we just had what i believe was a very productive meeting, where we heard from... >> it's as close to a blank check as you can get without actually asking for a blank check. >> narrator: paulson wanted the $700 billion authorized immediately. >> and predictably, the reaction on capitol hill was toxic. they were furious. >> america, you should be outraged about what washington is about to do. >> it is unprecedented and unaffordable and unacceptable expansion of federal power that our kids... >> narrator: conservative republicans in the house were in full revolt. >> but this is essentially mr. paulson's bill to help his friends, and i can't buy it. >> many of us felt like we were being asked to choose between the slippery slope to socialism and the next great depression. not the kind of decision that you want to make at the snap of a finger.
>> narrator: the bill was stuck, the markets plunging. suddenly, presidential politics intervened. >> america this week faces an historic crisis in our financial system. tomorrow morning, i'll suspend my campaign and return to washington... >> out of the complete blue, john mccain gives some speech saying he's suspending his campaign and he's coming to washington and he's calling a summit meeting, and he was going to solve all these problems for us. there was a very delicate negotiation going on, and he was just throwing himself into the middle of it for no apparent reason. >> i'm calling on the president to convene a leadership meeting from both houses of congress, including senator obama and myself. it's time for both parties to come together to solve this problem. >> he was sort of throwing a hail mary pass to say, "well, let's just... i'll suspend my campaign and we'll all go back to the
white house and we'll figure out what to do about this terrible economic crisis." >> the president has invited senators mccain and obama to the white house on thursday. >> the financial crisis affects the political campaign, and the campaign in turn affects the crisis. >> can this meeting, kind of a summit today with the president and barack obama... >> narrator: on september 25, a hastily called meeting at the white house. paulson arrived first. within 20 minutes, barack obama, john mccain, and prominent members of the house and senate. >> we go into the white house. there was a division with everybody on one side, house and senate democrats, senate republicans and treasury. >> we are in a serious economic crisis in the country if we don't pass a piece of legislation. >> they sit around the cabinet room table, and president bush says, "if we don't get the money flowing, if we don't get the credit flowing, this sucker could go down,"
meaning the economy as a whole. and then he opens it up. >> mccain walks into the meeting with, like, a cue card with a couple things scribbled on it. obama doesn't even wait for mccain to start. he just moves right in. >> senator obama has been talking to paulson, has been talking to warren buffett and paul volker and larry summers, and you know, and a host of other economic advisors. >> obama is prepared, and he talks about what needs to happen, and we'll pull together, and he's been... he doesn't want to take over in a country which is in depression, so he's extremely supportive of this whole emergency bailout thing. >> senator obama said, "well, i'd really like to hear from senator mccain, because he's the person who called for this meeting." >> mccain is fumbling with his cue cards. he doesn't even barely get started. obama kind of patronizes him, saying, "i think senator mccain has something to say."
mccain just melts on the spot. >> obama took charge, had authority. john mccain had no plan, no strategy. i don't think he understood what was happening, or didn't have a plan for what he wanted to accomplish. >> president bush whispered to nancy pelosi, who was sitting next to him, when mccain was talking, he said, "you guys are going to miss me." and she kind of laughed. >> t meeting ends up breaking up into a cacophony of shouting and screaming back and forth. and bush stands up and says, "well, i've clearly lost control of this meeting," and he walks out. >> and another republican at the table joked to the person sitting next to him, "after this, even we're going to vote for obama." that was the level of obama's dominance in this meeting. >> it becomes the turning point, because mccain started this. he suspended his campaign.
obama did not suspend his campaign. mccain promised some sort of dramatic action. he sent mixed signals, and did not seem to have the authority that a commander in chief should have. and i don't think he ever really quite recovered from that. >> narrator: it would take another week, but in the end, congress finally passed paulson's bill. the yeas are 263, the nays are 171. the motion is adopted. ( applause) >> narrator: paulson now had $700 billion known as tarp-- troubled asset relief program. >> tarp, like the aig bailout, is just a manifestation of the mad scramble that has to take place to try to contain the damage from years of neglect in washington and recklessness on wall street. i mean, the bill finally came due.
>> narrator: and that october, paulson decided to use the money in a dramatic way. secretary of the treasury paulson, the apostle of the free market and believer in moral hazard, would now initiate the largest government intervention in wall street since the great depression. >> he was put in the position of doing the last thing he wanted to do, which was to step in directly with government capital into the banking system. for him this is a step, this is a true crossing of the rubicon. >> narrator: on october 12, he acted. >> i got a phone call on sunday from secretary paulson. and he basically said, "ken, i need you to be in washington monday." and he said, "i really can't tell you a lot about it." >> he said, "be at the treasury at 3:00 tomorrow." i said, "well, what's the topic?" "you'll find out when you get there." i said, "well, who's coming?" "you'll find out when you get there. see you at 3:00."
click. >> narrator: seven other heads of the nation's largest banks received a similar summons. >> they turn up at 3:00, and they all file into the conference room, which is across the hall from mr. paulson's office. >> narrator: paulson got right down to business. >> because it's paulson, who's not a man who beats around the bush, it became clear relatively quickly what he was proposing. >> he says, "i've got here documents that say that the u.s. government is going to make an injection of capital into each one of your companies." >> narrator: paulson was about to hand out billions dollars. >> he turned it over to geithner and he said, "okay, here's how much you're going to get." and he went around the room, and he came to me and said, "$25 b-b-b-billion." and then the rest of them.
and i almost fell out of my chair. >> they go through in a very, very rapid way that each of us is going to take this taxpayer money, the tarp money. >> and he basically says, "you can't leave this room until you agree to take this money." >> we're all going to do it for the good of the country, for the good of the system. and it's not really discretionary. >> narrator: it was unprecedented. in return for billions of dollars, the government would take an ownership stake in the banks. but even with the financial system in free fall, some bankers fought back. >> it was a very contentious meeting, lots of questions, lots of doubts. >> narrator: richard kovacevich, chairman of wells fargo, led the charge. >> kovacevich stood up and said, "i don't want the money. i don't need the money.
i don't want the money. i want to have nothing to do with this." >> i don't know how much further we went before i was interrupted by hank, who said, "your regulator is sitting right next to me. and if you don't take this money, on monday morning you will be declared capital deficient." i was stunned. >> narrator: paulson gave each man a single piece of paper spelling out the conditions. >> before they had to leave town that night they were told, "return this document with your signature on it." and all nine of them did so. >> narrator: the terms were extremely generous. >> they don't have to modify any mortgages. they don't have to put limits on their own salaries or their own compensation or their own bonuses. they don't have too anything differently than they were doing before. they don't even have to agree to major regulatory changes.
basically, they are sitting fat and pretty and happy. >> narrator: treasury secretary paulson had just given $125 billion to the nation's richest banks. and it was only the beginning. >> the real story of this financial crisis is probably not so much whether the bailout was the right thing to do or the wrong thing to do. the real question is, how did it come to be that this nation found itself with two stark, painful choices, one of which was to wade in and commit trillions of dollars to save the financial system, where we still end up losing millions of jobs, millions of people lose their homes, trillions of dollars of wealth is wiped away, and the other choice is to face
the risk of total collapse? that's the real story. how did the policy makers, our government leaders, the financial sector, maneuver this country into that kind of corner? >> next week, the epic story continues. >> the american people were angry. >> those banks needed to be held accountable. >> inside the politics of the bailout. >> without it being revealed to the public, banks were given access to capital worth trillions and trillions of dollars. >> secret funding to the banks "too big to fail." >> if the american people found out, there would have been a revolution. >> there was almost two faces of obama. publicly, he wanted to tell you that these were the fat-cat bankers. privately, he wanted to get them on board. >> a global crisis. >> these bankers were fanning out across europe. investment banks such as goldman sachs were eager to lend to risky places such as greece.
>> even convents were being sold derivatives. >> and a culture of greed. >> it's actually known as casino banking. >> one loophole after another. >> they came down here like sharks to raw meat in the water. >> have i got a deal for you. >> "money, power and wall street"-- part 2, next week on frontline. >> "money, power and wall street" continues online with a dynamic oral history. >> rotting in the system... >> 20 original interviews, including seven to watch at length. >> incredibly new stuff. >> first-hand testimony from deep inside the crisis. >> to the president's credit... >> navigate by theme or perso. >> cool head in a crisis. >> explore the personal experiences that shape current events and make history. at pbs.org/frontline. >> frontline is made possible by contributions to your pbs station from viewers like you. thank you.
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