Join Jason Hartman as he interviews author and financial journalist Roger Lowenstein regarding the history of Wall Street’s demise. Roger talks about the increases in choice, risk, hedging, more volatility, and how free markets are open to speculation, greed, fear and manipulation. There are more markets today susceptible to booms and busts. In the old days, local bankers determined loan eligibility. Today, bankers internationally, who don’t know anything about their clientele, determine eligibility, often to the detriment of the borrowers.

Roger and Jason debate whether Wall Street needs more regulation or deregulation, and discuss the consequences of government interference. They also talk about many of the Wall Street mistakes and the corporations that were rescued by the bailouts and the unprecedented number of failed mortgages.  They end their discussion with observations of the Occupy Wall Street movement.

Roger Lowenstein graduated from Cornell University and was a reporter for the Wall Street Journal for more than a decade, including two years writing it’s “Heard on the Street” column. He has published five books, including The End of Wall Street, When Genius Fails, and Buffet: The Making of an American Capitalist. He is also the director of Sequoia Fund. Roger is the son of Helen and Louis Lowenstein. His father was an attorney and Columbia University law professor who wrote books and articles critical of the American financial industry. Roger himself has also written numerous financial articles.

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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.

JASON HARTMAN: Welcome to the Creating Wealth Show! This is episode #237, and I’m your host and reporter, Jason Hartman. Thank you so much for joining me today. And I got a lot of great feedback on the last several shows, really, but the last show, #236 as well, with Rich Dad author Ken McElroy. Had a great breakfast with him last week, and really enjoyed him. And I even asked him if he wanted to come and speak at our Meet the Masters event, which is coming up in March, and he’s checking his schedule. So, I’m not saying that he is, but he is checking into it.

By the way, we just posted that on the website for the Hyatt Regency Irvine for March 24th and 25th. However, and this is a big giant however, one of our speakers instantly said, you know what, that’s spring break for a lot of people, and you might want to switch the dates. So I called the hotel, and we’re thinking of switching it to the weekend of, I guess that’s March 10th and 11th, two weeks earlier. So, if you have any feedback on that, let us know really fast. Go to www.jasonhartman.com, fill out the contact us form, and write your comments in there, and let us know. Or if you’re working with our investment counselors, give them some feedback, and we will be happy to take that into consideration.

So, it will be in March. Hyatt Regency Irvine, our usual venue. You know, we were thinking of doing that event in the greater Phoenix area. But I gotta tell you, it’s amazing to me. You try to do an event in Phoenix, Scottsdale, in the springtime, the high season, with baseball spring training going on, and just all of the great activities here that make this such a great place to live, and good luck. Because I had one of my assistants call around to hotels here, and they wanted 5 and $10,000 a day food and beverage minimums; they wanted guest rooms, $250 a night plus, plus, just—it was amazing. So, definitely not a good fit, when we can do the beautiful Hyatt Regency Irvine where we’ve had our event so many times. And we can get you guest rooms for $99 a night. Much better to be prudent, and also enjoy a great venue, enjoy fantastic California as well, and use that saved money to get out of the rat race and invest in income property. A much wiser thing to do.

So, we want to be prudent with our investors’ money. And speaking of which, we’ve got a couple of specials you might want to check out, and I’ll tell you about those in just a moment. A couple of product specials. I don’t know how many of you have heard of Equator, but Equator is this system that real estate brokers and agents use, and sellers use—sellers that are wanting to do distressed sale transactions, and boy, that’s most home sellers nowadays, or most property sellers in general, I should say. And Equator released some interesting statistics recently, that said that they see nearly 1.2 million short sales were initiated through its system over the past two years. Now, remember, folks. Why do I bring this up? Because, remember that 1 million equals about 1%, and 1% equals about 1 million.

Well, what do I mean by that? We’ve mentioned it on prior episodes. When you see 1.2 million short sales initiated through the Equator system, that means that the homeownership rate in America has dropped by at least 1.2%. Now, what did this people all need? Well, they’re probably not going to be running out to buy a new home. They’ve gotta live somewhere. So they’re going to do what? They are going to rent. And I venture to say something even a little bit more, maybe, politically incorrect, or slightly distasteful, but here it is. Financial hardship, what does it cause? Well, many times it causes the big D word. You know those wedding vows? Through better or worse, sickness and health, for richer or poorer—well, financial stress causes divorce. So, a lot of times, these distressed sale households, if they’re a couple, they turn into two households, not just one, creating even more demand for rentals! And when you look at the stats, the marriage rate in the United States is the lowest it’s been in decades!

So, things are changing. I’m not making a social commentary on this, whether it’s good or bad. Actually, I kind of think it’s bad. I’m single. I’d like to be married. I’ve wanted to be married for a long time. I always thought I’d get married in my late 20s, but it just never worked out that way. And you know, listen. Each obviously has its own advantages and disadvantages. Marriage, a very big decision. I guess that’s life’s biggest decision of all, isn’t it? And it can be great when it’s great, but it can be absolutely horrific when it isn’t the right match. So, there are obviously advantages and disadvantages to each side of that coin. But you know, regardless, financial hardship causes divorce. There’s no question about it. No one can argue with that. That’s not anecdotal; it’s empirical. And also, the marriage rate is declining dramatically. So, this means more demand for housing. Remember, you need two houses instead of one. You need two places to live, two residences, instead of one. So that means more opportunity for investors.

So, here’s a snippet on the Equator thing. Default servicing technology company Equator says, nearly 1.2 million short sales were initiated through its system over the past two years. The company tracks this data through its default servicing platform, which helps mortgage industry clients deal with loan modifications, short sales, deeds in lieu—that means a deed in lieu of foreclosure, when you simply hand over the keys, hand over the deed to the property to the lender, instead of doing a foreclosure—and foreclosure processing, and REOs. In other words, Real Estate Owned. Los Angeles based Equator said Wednesday that more than $150 billion in assets have been sold using its platform over the past 8 years. Analyzing trends from the recent fourth quarter, Equator said, servicers heading into 2012 are focused on compliance issues. What does that mean? That means lenders and servicers of mortgages are what? They are fearful. They are afraid to foreclose, because all of the scandals, all of the robo-signing, all of that stuff. So, big, big things going on. Big opportunities for us as investors.

Now, today in the show, our guest is going to talk about the end of Wall Street. Well, wouldn’t that be nice? Now, I say that obviously tongue in cheek. Listen, folks. I know that I constantly bash Wall Street. And I think Wall Street deserves probably a lot more bashing than I give it, and a lot more bashing than all of us give it. However, the concept of a stock market is great for capitalism, because it does allow middle class people to invest in things they couldn’t otherwise invest in. Certainly, and I’m speaking conceptually here, it allows for economic growth. It’s a huge engine for economic growth. But of course, in the last couple of decades, it’s been so completely, disgustingly perverted in every way, and the fat cats are just getting all the benefits while everybody else is getting the short end of the stick.

And on that note, a recent article here I have, and this is a USA today article, Gary Strauss says, more CEOs rake in $50 million and up, and a couple snippets from this article. And I did not know this until the other day. I cannot believe it; I had no idea he was making this kind of money. But good old Tim Cook, who took over for the late Steve Jobs—$378 million? Wow. Qualcomm’s Paul Jacobs? $50.6 million. Tyco International’s Ed Breen? $68.9 million. JC Penny—and I don’t know about you, but I thought JC Penny was kind of a dying company. Haven’t kept track of them lately, but I remember from my childhood, we had those old companies—Sears, Montgomery Wards, JC Penny, Mervyn’s obviously went out. Kmart, largely went out. I thought those companies were kind of a dying breed, and there were new companies coming in to replace them. Well, whatever the case, I’m not sure what JC Penny’s up to. But, Ron Johnson, heading up JC Penny, made $51.5 million.

And get this. Exit packages are even more lucrative. Nabors Industries will pay Chairman Gene Isenberg $126 million when he steps down. While Motorola Mobility CEO Sanjay [Jha]—how do you say that? I don’t know. Anyway, Sanjay, and Temple-Inland CEO Doyle Simons, are due more than $60 million once their merger is finalized. Compensation experts say that corporate directors are wrestling with oversized pay plans, but many are hampered by deals hatched by other boards seeking new talent. Well, you know what? I bet that’s not really true. They say that, but in reality, as long as the board is getting a lot of money, they’re gonna let the C-level executives get a ton of money as well.

As I’ve said before, I’m a capitalist, okay? I see nothing wrong with this, as long as the shareholders are being rewarded proportionally. And the other stakeholders. Stakeholders are not shareholders, necessarily. Stakeholders are employees, vendors, other stakeholders involved with these companies. These companies are so giant nowadays that I really think that they have a social obligation to be fair with all stakeholders involved with them. I know that may sound slightly leftist. Don’t worry, I’m not a leftist. And then it goes on to say in the article here: Iger, for one, who stand to make a lot more under a new contract—Disney is paying him at least $30 million annually, through 2015, up 43% from his old base pay. Unbelievable. What a total scheme and scam.

Be a direct investor, stop making everybody else rich, invest in your own properties, be a private lender, I’ve been doing more and more private lending myself, financing a lot of deals, that you are buying! That our clients are buying. Both from the end where our vendors need the financing to buy properties at auction—that’s a very capital-intensive business for them. Think about it. Every property might cost them 60, $70,000, or more. Maybe a little less at times. And they need to buy these properties at auction, hold them for four months, and turn around and rehab them. Get them rent-ready. Many times, put tenants in the properties. And then offer them to you, our investor clients. And I finance some of those deals. And you know what? If you have an interest, I suggest you do the same, because I’m earning over 12% on money that I loan out for sometimes 92 days, 94 days at a time.

You know, I like that short term lending, when I get my money back so quickly. And several of our clients are doing it as well. If you’re interesting in this, just shoot me an email: [email protected], and I will connect you with the right people. Also, subject to applicable laws, not eligible in all states, etcetera, etcetera, there’s a little bit to it, but I’ll introduce you to the right parties. You can find out the details, it may or may not be for you.

We do have a couple of nice, big, huge discounts, actually. One discount’s about 66%, the other’s about 50%, on two great products that you should definitely have. Number one is our Creating Wealth Home Study Course. Normally—what is that normally? $297, I believe? Well guess what? You can get $200 off, and you can buy that for 97 bucks. What a deal. That’s about 5 or 6 hours of audio. It includes two books—the workbook, it’s an interactive workbook, and you can fill that out as you listen along on your iPod, in your car, at home, whatever. And it’s a digital download of the audio and two PDF files as well as a complete, beautifully done, transcript of that foundational course that I teach. And thousands of people have been through it. I’ve taught it for several different companies over the years. And it’s really great. So, if you go to www.jasonhartman.com, you select the Creating Wealth Home Study Course, and you enter the promo code, CW200—so, Creating Wealth, and a $200 discount—CW200 is the promo code; go to www.jasonhartman.com, click on the products, take advantage of that.

And the Financial Freedom Report! Great way to start off the new year is to be a subscriber to our highly acclaimed Financial Freedom Report newsletter. And that’s where we talk about a lot of the stuff we just don’t have time to talk about on the show, or even at the events, at the Meet the Masters events. This, again, is a whole nother avenue, a whole nother outlet, where you’ll learn a lot more stuff, and you can get $100 off on that, so you can get it for only $97 as well. And the promo code: FFR100. So it’s the Financial Freedom Report, FFR100, is the promo code, you can get a full year’s subscription to that.

So, before we get to our guest, a couple more things I want to talk about here. In Porter Stansberry’s newsletter, he says some really interesting things that totally tie in with today’s show, and I just wanted to mention them here before we go to our guest, because they’re very applicable when we talk about Wall Street—the end of Wall Street. We talk about the corruption of capitalism. Capitalism, a great thing. But again, like I’ve said before, I don’t think Wall Street represents capitalism anymore. I think it has completely detached itself from capitalism, and it is now capitalism on a nominal basis. And I talk, always, about nominal dollars and real dollars. Constant dollars, or inflation, or deflation impact dollars, and so, nominal means in name only. So, Wall Street’s capitalist in name only. It’s an insiders’ game.

So, listen to this, in the Stansberry newsletter. He says, the 10 largest American bankruptcies in history have all occurred in the last decade. Lehman Brothers: $691 billion. Washington Mutual: $327 billion. WorldCom: $103 billion. General Motors: $91 billion. CIT Group, the commercial lender, about a hundred year old company, okay? $80.4 billion. Enron: $65 billion. Conseco: $61.4 billion. MF Global—you’ve heard a lot about them in the news lately; we’ve talked about them on the show—$41 billion. Chrysler: $39.3 billion. Thornburg Mortgage: $36.5 billion. All of these failures have a few things in common. Extremely well compensated CEOs. What a surprise. With long tenures, which suggests that the board of directors was asleep at the wheel. My comment: or getting paid not to pay attention. Vast amounts of debt that would seem completely unsafe by any reasonable standard, and accounting policies that deliberately misled investors. Most tellingly, in the vast majority of these cases, board members and executive management have no material investment in the company. In other words, they have basically sold off the vast majority of their shares.

And I know a lot of you stock people—this is me talking, by the way, not the article—I know a lot of you stock people, you look at what the insiders are doing, right? Well, if an insider—if the CEO, if the CFO, if the COO, if the board of directors—if all those inside people, if they own a bunch of stock in the company, well, then that’s a sign of, they have faith in the venture, right? Not so fast. Because what is quoted when you see those figures is the amount of stock they own. So, say for example, an insider bought up $2 million, or $5 million worth of their own company stock. Well, all the stock investors go out, and they think, gee, isn’t that great? That’s a sign that they have faith in the company. But the reality is, they’ve got a $300 million net worth, and they just look at, gee, if I can buy up $2 million or $5 million worth of stock, and push the needle, as I’m making $60 million a year or $120 million when I’m going to exit the company, it’s essentially a pump and dump scam, folks! Look at how much stock they own as a percentage of their compensation, and as a percentage of their net worth. I mean, that stock could be a drop in the bucket for them. It could be pennies. It sounds like a lot to you and I, but in reality, you’ve got to consider that in accordance with their compensation and their net worth. Then you understand how at stake they are.

One more thing from the Stansberry newsletter. And this is interesting too, because before I shared on the show how he talked about the late Steve Jobs, and it’s always, never speak ill of those who have passed away. And I love Steve Jobs, and he’s done incredible things. What a great inventor, etcetera. But you know, he profiled his misdeeds with Apple, and how he would screw around with the numbers and the backdating, and then how he hired Al Gore and covered things up. I mean, it’s just rampant, folks. You’ve gotta just assume everybody’s doing it, and that’s why you need to be a direct investor. Thou shalt maintain control, Commandment #3. Control the things you invest in. Buy a bunch of little single family homes. Get a couple of apartment buildings. Get some notes and trust deeds and do some short term private lending. This stuff you control directly. There’s no middle man skimming the profits off the top.

Okay, last thing from the Porter newsletter, and then we’ll go to the guest here. He says, I can’t name a single major Wall Street firm that hasn’t engaged in massive fraud over the last decade. Not one. He’s saying, not one that hasn’t engaged in massive fraud over the last decade. Not one. They have all paid massive fines to the SEC, the Securities and Exchange Commission, but in only one of these cases was any firm held criminally responsible. And that firm was Arthur Andersen, Enron’s accountant. What about the bankers who actually lent the firm money against collateral they knew was bogus? What about the investment bankers who sold Enron stock to the public, even though they knew the earnings were fraudulent? And what happened to the huge corporations whose depositors, executives, and lawyers were all full, active partners in the fraud that bankrupted Enron? Namely, Citigroup and JP Morgan, the two largest banks on Wall Street. It’s just unbelievable, isn’t it?

I mean, folks, we’re talking today about the end of Wall Street. Roger Lowenstein will be back with us to talk about that in a moment. Make sure you join us for Meet the Masters in March, in Southern California, and take advantage of those products I mentioned. Look at the properties on our website, things you own and control directly, where you have returns projected well upwards of 20% annually. And by the way, I gotta make one more comment on the properties. I don’t even claim to call everything right. And you know my big prediction that has not come true, that I’ve been talking about for years. I’m surprised interest rates are still this low. In fact, I’m floored. I’m shocked that interest rates are still this low. The way I called that, I thought they’d be much higher by now. How long can they kick the can down the road and keep this house of cards afloat the way they’re doing it? It boggles the mind, it really does. It defies gravity, it defies logic.

Another one that I totally underestimated—St. Louis. St. Louis has been an amazing success for us, that market. I’ve told you many times, I really like Atlanta right now. Great market. We’ve been doing great things there. But you know, also, I gotta draw your attention to St. Louis. The properties have phenomenal cash flow. I was looking on our website the other day, under the www.jasonhartman.com/properties section, and projected returns exceeding 40% annually. Not bogus, not hype; conservative. Things that can come true in reality. Because income property is a multi-dimensional asset class. And look. If it only works out half as well, well, you make 20% annually. That can’t be all bad, right? But certainly you can loan your money on short term loans, and earn upwards of 12%. So, that’s what we have to offer. Things where you are direct investors, that you directly control, where you won’t have some criminal on Wall Street skimming the profits off the top.

So, we will be back with Roger Lowenstein. This is a fascinating interview, as he talks about the end of Wall Street here, in just a moment. We’ll be back in about 60 seconds.

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ANNOUNCER: Now you can get Jason’s Creating Wealth In Today’s Economy Home Study Course: all the knowledge and education revealed in a 9-hour day of the Creating Wealth Boot Camp, created in a home study course for you to dive into at your convenience. For more details, go to www.jasonhartman.com

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JASON HARTMAN: My pleasure to welcome Roger Lowenstein to the show! He is the author of the End of Wall Street, When Genius Failed, and I think you’ll find this interview to be very interesting. Roger, how are you?

ROGER LOWENSTEIN: I’m very good, Jason. It’s a pleasure to be with you.

JASON HARTMAN: Well, likewise. Let’s talk about the End of Wall Street. And you’re the author of five books, I believe, but tell us about this one in particular! It seems to me that for the last 30 years or so, the financial services industry has had such a great run, and maybe that leads us to a bit of a bubble. There’s so many scandals and problems, and tell us more!

ROGER LOWENSTEIN: Well, I think we certainly had a bubble. You know, we had a huge bubble, obviously, in mortgages, and in the stock market. In the business of banks, and we’ve seen it’s just sort of a bunch of related bubbles or scandals about how, anything from Bernie Madoff to how the banks packaged mortgages and sold them to investors and so on. And how the credit rating agencies operated. But the End of Wall Street, which is the title of the book, was meant to suggest that speculation and the notion that free markets and Wall Street could do no wrong, and needed no regulation, and all these things really reached a peak in the last cycle, peaking in ’07 or so. And the world that we’re emerging from, or into, is really gonna be different than that era. That we’re gonna have more regulation, less profitable banks, more of a government hand, higher unemployment, more volatile and less exhuberant stock market, people more afraid to invest in the stock market, or afraid to do anything with money. And I think that you’re seeing most of that play out. It—I read just recently how bank profits haven’t come back, real estate markets haven’t come back—whatever the new normal is, it sure feels different to me than pre-2007.

JASON HARTMAN: Well, I would certainly agree with that. Now, when we talk about the end of Wall Street, Roger, I guess that really needs to be parsed up into what we consider to be Wall Street. I mean, of course there are the companies there, the people that own shares in those companies, and bonds for those companies. But also, there’s the financial services industry that seemed to change a lot. Of course, my life hasn’t been long enough to really know. But I kind of look at the 80s as a fundamental change; when people used to invest for income, they used to be dividend investors, and it seems like a whole new breed took over in the 80s, where it became largely a capital gains and speculation market, and a market more about hot stories than good old fashioned blue chip stocks that paid dividends.

ROGER LOWENSTEIN: You know, you have to remember that there was a fair amount of speculation in the 20s, and there was also a fair amount of speculation in the 1960s, the Go-Go years, when people were buying electronics stocks—they were the precursor of Internet stocks.

JASON HARTMAN: But back then, yeah, and of course, I do realize that, especially in the 20s, don’t know as much about the 60s. But were those companies, back in those days, more—even if they were speculative, were they companies that planned to pay dividends, or did pay dividends, and the investors were still looking for income? Even if it was kind of a hot story, or a hot new—

ROGER LOWENSTEIN: Not a lot of them. There was a gross stories. Gross stocks, that term came into its own in the 60s. But let me pick up on your question in a different way, because I do think the financial climate has changed, and become more speculative, and more short term. And I think there’s a proliferation now of financial assets trading that we didn’t have before. Not just, by the way, in securities, but the choices, when you get a mortgage—do you want it fixed, do you want it adjustable, do you want a 10 year or a 30 year, what do you do with your savings, do you put it in the money market, do you take more risk? If you go back to the 1970s, the early 70s, you really had one choice, which was, put it in the bank, or stick it under the mattress. And I think what has happened since about the early to mid 70s, is, we’ve had consistent deregulation. So we’ve had more markets opening up. More financial instruments. More opportunities. Sure, for hedging and efficiencies, and all that, but more volatility, more risk.

More markets that are susceptible to booms and busts. If you think about the oil market for a second, the price used to be controlled by Texas oilmen, basically. And then it was controlled by Saudi sheiks. They wouldn’t always get the price perfectly right. But now, of course, the price is controlled by markets, and you’ll see the price of a barrel of crude run up to $140 a barrel, and then a year later it’s back down to 40, and then it’s up to 90. And because open markets, as good as they are, they are susceptible to speculation, greed, fear, all this. And one other very important example is the mortgage market. It used to be the local banker who decided if you qualified for a mortgage. Usually, and hopefully, by asking some intelligent questions about your income and your family situation and so on, and maybe even knew you, if it was your town banker. And you know, they halfway knew those answers before you walked in. Now the people who determine whether you should get a mortgage are investors around the world who’ve never met you, never heard of you, and never will. You know? It’s just, how much demand do they have for higher yielding assets? That determines whether you get a mortgage, regardless of whether you, Jason, can afford that particular mortgage. And I think that is—that dynamic of shifting more and more economic relationships into an unregulated market setting, has given us a very different economic environment than we grew up in.

JASON HARTMAN: Yeah, it’s sure not the old days of Jimmy Stewart and It’s a Wonderful Life at the thrift a loan where you knew all those borrowers and all those depositors, is it?

ROGER LOWENSTEIN: Absolutely. Where the banker was the most respected man in town, and now, unfortunately, deservedly or otherwise, bankers are as much ill reputed as journalists.

JASON HARTMAN: Yeah. That’s for sure. And the politicians too. So, are there more scandals on Wall Street now, or is the media just reporting them differently, or are we more aware of them? I mean, the people were always insider trading, I’m sure, and doing things they shouldn’t be doing, and committing financial fraud.

ROGER LOWENSTEIN: Yeah, well, there’s an old saying, that if you didn’t have speculation and fraud, you wouldn’t have the railroads. You know, the big incentives do create—the opportunities create the incentives to speculate, and among some people, to cheat. And as Warren Buffet once said, you don’t encounter a lot of traffic when you take the high road on Wall Street. It attracts people there to make money, and not all of them are the most ethical. To your question, whether there’s more—I think it’s very hard to know. If you think of the 1920s or any of the decades before there was regulation, they see everybody cheating, or you could say nobody did, because there were no rules. So it wasn’t really cheating. It was normal for people who ran companies to manage the stock, to create runs, and short their own stocks, game the investors—I mean, what went on was really atrocious. So, what we’ve had since then is an increasing framework, a set of rules, that restricted the most sort of naked abuses.

Except we get periods where the abuses come running back. We had it recently really because of this doctrine promoted by ultra free marketers, including Alan Greenspan, the head of the Fed, that you didn’t need any regulation. And you know, I think when you tell that to a bunch of bankers, wow, we can do whatever we want, some of them will. Now, Greenspan didn’t mean they should cheat and break the law. And there’s no explaining Bernie Madoff. That’s just—no law’s gonna stop someone who—it’s like, passing a law against violent crime. You have it to stop the 99% who are gonna listen. There are always gonna be some people who won’t. I think, to the extent that banks have become bigger, more distant from their customers, I think it becomes if not more fraudulent, less careful. You used to walk in, they didn’t want to lend you too much money. Hopefully for your good, certainly for their good. Now, they don’t know you, and they don’t—their good doesn’t enter into it, because they’re gonna sell that loan and hour and a half later, anyway. So I think the financialization of the economy, and of the financial industry, has made financial firms less cautious, less prudent, and less like bankers should be.

JASON HARTMAN: Well, that’s an interesting term you use, Roger. You know, the financialization. I like that. That’s—I get what you’re saying when you say that. So when you look at the regulation issue, I mean, I consider myself to be a free marketer, and have a libertarian bent, I guess you could say. And it seems as though you’re advocating more regulation, and this is such a complex, incredibly complex world, that I don’t know that the market can regulate itself. Because it’s just too complex nowadays! But I don’t know that government can do it either, you know? That’s the problem.

ROGER LOWENSTEIN: Let me just stop you there. I think when you say you’re a libertarian, and I say I’m for regulation, I don’t really believe we’re as distant, as apart, as those phrases suggest. Because I think we’re maybe at different places on a continuum, but—

JASON HARTMAN: They do meet. I mean, they do kind of meet—

ROGER LOWENSTEIN: You do believe in regulation. I’m gonna ask you. I mean, let’s take insider trading. I mean, a lot of insider trading arrests, leading to convictions, lately. And, now I want to ask you and your listeners. Would you be comfortable in a world where when you bought General Electric stock, just picking on, just citing that as a well known corporation, where the executives would be free, every time there was a development, an unannounced development, to say, a product is good, to buy the stock, tip of their friends, do what they want, maybe hold back the good news so the stock would be cheap, then when they wanted to sell, put out a lot of—pump and dump. Put out a lot of good news, you’d come in and buy it, then they’d put out the bad news. I don’t believe you want to live in that kind of world?

JASON HARTMAN: Of course not, of course not.

ROGER LOWENSTEIN: So, we’re talking about what types of regulation work, what don’t work, what are the behaviors that we want to disincentivize, and so on. But, you wanted to ask me about Freddie and Fannie—

JASON HARTMAN: Yeah, well you know, and here’s what I was going to get to. Is really not—and I know we’re not that far apart, in that vein, of course. But what I wanted to get to was the concept of attacking the cause, or the symptom. And when it comes to like Fannie and Freddie, the free market—the true purists in the free market thinking—would say, well, there should have never been a Fannie Mae and Freddie Mac. The government shouldn’t be backing mortgages. The government shouldn’t even be in that business at all. And granted, that would have changed the whole complexion of the real estate market for many decades past; we all know that. But with the stated goal of Fannie Mae to be to promote homeownership, whenever you promote something, the price goes up, right?

ROGER LOWENSTEIN: That’s right. And let me just say that Fannie Mae was created in 1938, in the mid 30s. I believe ’38. But there was a federal home loan board that came, early to mid part, and they opened Fannie Mae. And it was very hard to be a purist in the Great Depression, when millions of people were being foreclosed on, in particular farmers. When no one had jobs. It was a moment when pure capitalism maybe didn’t seem quite as attractive to most Americans as did somewhat adulterated capitalism. So they went with it. And I’ll agree that, obviously, it distorts the market. If it didn’t distort the market, there’d be no reason to have it, because we could just have the markets. So it does distort the markets. And I’ll also agree that I think we take a big risk. If you want to support mortgages, an out front way to do it is just to pick a number, whatever the Congress approves—a billion, ten billion, whatever it is a year—and say, put them into mortgages. But when you say, we’re just gonna guarantee a growing number of loans every year, and pretend it’s gonna cost us nothing—I think that’s a very risky way to do it. At least if you have the Congress say, we want to support mortgages. We’re going to appropriate x; x is what you spend, rather than, what is it now, I think it’s over $200 billion that Fannie and Freddie have cost us. It’s easily the most expensive part of the bailout—

JASON HARTMAN: It’s too much. No question.

ROGER LOWENSTEIN: But let me just say one other thing though, because you also mention causes. And it’s a widely held belief, you know, that they caused the mortgage fallout. And I don’t put this quite in the camp of the CIA killed Kennedy or something, but, I think there’s been a fair amount of conspiratorial thinking. And I show in my book, Fannie and Freddie were in the business—they had a lot of business. But one of the things they were doing was putting together mortgages that they guaranteed, putting them in package, securitizing them, and selling them to investors. And private label firms—you heard of Bear Stearns, you heard of Lehman Brothers; firms like that. Morgan Stanley—you tend to go into competition with them. And instead of taking guaranteed mortgages, they would take mortgages that weren’t guaranteed; instead of taking conventional 30 year loans, they began to take more [unintelligible] loans, which is a term for a riskier loan, more subprime loans, really riskier loans. And they began to take business away from Fannie and Freddie! And Fannie and Freddie realized that to compete, to hold their market share, they had to start accepting the same types of loans. And there are memos—and I reproduce and quote them in my book—where they say, we have to meet the market where the market is, or we’re going to lose share. And of course, they did meet the market where the market is. But the point is, the speculation, the bad loans, the foolish risk taking, was there before Fannie and Freddie, and they raced to catch up, to emulate what I’ll call the foolish pace setters in the private market.

JASON HARTMAN: I agree with you. But those are the kinds of—I believe those are distortions that occur in the market, and that’s why, when you have government-backed players, it’s sort of nobody’s money. It’s kind of that way on Wall Street too, when you’re dealing with funds and so forth. But, I know that there’s not a lot of—

ROGER LOWENSTEIN: It kind of is, isn’t it?

JASON HARTMAN: Yeah, it is. It’s nobody’s money. If it’s everybody’s money, it’s nobody’s money.

ROGER LOWENSTEIN: I mean, if you think—just to say one thing, in the Lehman Brothers of old, which was a private partnership, Dick Fuld went home every night, knowing that he was on the hook for whatever the liabilities of Lehman were. His capital, anyway, was all tied up in that firm. Dick Fuld, of course, the former, the long time CEO of Lehman. He was going to be a lot slower, a lot slower to put Lehman’s assets into dicey real estate. Ditto the executives of Bear Stearns, and all the other then-private partnerships of which Wall Street was made up. It became, finally, the public’s money, and the banks had a great one-way option. Heads we win, tails the public loses.

JASON HARTMAN: Yeah, right. Right. So, do you believe—

ROGER LOWENSTEIN: Public investors, I mean.

JASON HARTMAN: Yeah, I get it. Was it a mistake to not save Lehman?

ROGER LOWENSTEIN: Well, in hindsight, I could tell you just about every mistake that was ever made on Wall Street.

JASON HARTMAN: Right. I mean, should they have been put in the too-big-to-fail category, and bailed out?

ROGER LOWENSTEIN: I don’t think so. I think maybe it was a mistake to bail out Bear Stearns, because I think—that of course happened in March of ’08, about six months before the cascade of failures in September. Because I think that set a tone, an expectation. I know it did. That financial firms would be rescued. But if you remember what happened, Lehman week, the government had bailed out Bear Stearns, which it didn’t want to do. Then Paulson “fired his bazooka,” to save, to rescue Fannie and Freddie, which he really hated doing, but which he felt the need to do, because people had assumed that they were government-guaranteed, and the US government had never disputed that. And then we were sort of honor-bound. We couldn’t say—the Chinese and other foreign investors weren’t going to understand it if we said, well, we didn’t really mean it. So, people were very tired of bailouts, at that point. No one likes a government bailout, least of all a good republican like Hank Paulson.

And Lehman’s in trouble, and he says okay, it’s time for risk takers to bear the pain of the risk they took! All that good stuff. And all that free market stuff that you were talking about. And in hindsight, all you know what broke loose. But the entire Congress, all of it that got in touch with the regulators, said don’t you dare give a penny to Lehman Brothers. The American public felt that way, and there was no knowing ahead of time that things were going to go downhill so fast. And by the way, there was no proof that even if we had bailed out Lehman, we wouldn’t have had all the trouble. I think we would have. If you look at what happened two days later, AIG was on the hook, and this time, Paulson and Bernanke said, we can’t take it anymore. The pain’s too great, the panic’s too great, and we’re going to step in. And they saved AIG, and what happened? The dominos kept falling, and they kept falling, and they kept falling. So, by the time the decision came to bail out Lehman or not, the damage was done, the damage meaning all those loans that had been issued, tens of millions of people were living in homes with mortgages they couldn’t afford to service, those mortgages were held by banks and investors around the world who were taking tremendous losses, and you know, someone was going to eat those losses. And I don’t think at that point there was a magic bullet.

JASON HARTMAN: This conversation would not be complete without talking about what is going on on Wall Street, and literally in the street, and on streets all over the world right now. And that, of course, is the Occupy Wall Street movement.

ROGER LOWENSTEIN: Yeah, yeah, I was down there last week.

JASON HARTMAN: What are your thoughts?

ROGER LOWENSTEIN: Well, you know, I don’t think it’s extremely articulate, the protests. I don’t think they have much in the way of solutions. I don’t even think that the so-called villains that they’re pointing to, in many cases, are the right villains. Look at John Paulson, that’s a hedge fund investor that bet the right way. He bet against the mortgage bubble, and helped to deflate it on his own, and they were marching on him. However, I think they’re pointing out a very real problem, a problem that has found expression in Occupy Wall Street, and maybe even on the right, amongst the Tea Party, which is that the American economy has not produced gains for a larger and larger part of the people, for 15, 20, now 25 years. The median incomes are flat over the last cycle; they’re actually falling. They’re falling not just for blue-collar workers anymore, but even for people with college educations.

JASON HARTMAN: And you’re referring to people who have jobs. So it’s even worse—

ROGER LOWENSTEIN: And you’ve got 9% unemployment, four years after the bubble burst. We’ve got a rising inequality of income, which isn’t to say that the people at the top are necessarily doing something wrong, but it is to say that the gains are all going to a narrower and narrower slice. This is not the picture of a healthy economy. And the premise, the reason, really, that democracy—we say, go out, earn what you can. Speculate. Make a million bucks—is that we think and we believe that you’re part of the invisible hand. You’re doing—you’re bearing the work of directing assets where they should go, and you know, most productive uses, and all that. And in time, make all of us richer. And for a generation, it hasn’t really been working. And while Occupy Wall Street, the people there may not articulate all this, and they may not have solutions, no one has had a solution for a generation! And I think that’s why you see such frustration. And what are we gonna do in this global economy? How do we, when the people in Chicago are basically in the same wave of markets as with people in Bangalore. And that’s a heck of a problem. I believe in free trade, but—

JASON HARTMAN: Sure. The wages are so far away from equalizing—

ROGER LOWENSTEIN: And I’m a free trader. But I think that the—I think this is, these people are the canaries in this very dark coal mine, and we’re gonna have to both parties and elsewhere, start addressing it.

JASON HARTMAN: And I just got an interesting take on it, I think it’s somewhat interesting, that I’d love to get your opinion on, before we go. And that is that when you look at the right wing media, they’re trying to vilify the Occupy Wall Street protesters as hippies, and people that just don’t know what they’re talking about, anti-capitalist. And I find that remark particularly ridiculous, because they say they’re anti-capitalist. And I don’t think Wall Street is very capitalistic! Think about it. When you get to trade on lobbyists, cronyism, and massive amounts of scale, I don’t think there’s much capitalism on Wall Street at all.

ROGER LOWENSTEIN: And guaranteed bonuses.

JASON HARTMAN: Yeah, and too-big-to-fail bailouts, and guaranteed bonuses, thank you.

ROGER LOWENSTEIN: That’s Soviet economics.

JASON HARTMAN: Yeah, it’s kind of like a fascism, or feudalism. I don’t know. It’s not capitalism.

ROGER LOWENSTEIN: I hear you, yeah. But I’ll say this. This is not—look, I was a kid in the hippie era, and this is very different. That—we weren’t marching for economics back then. I mean, it was a movement of affluent or middle class kids who didn’t like the war, and didn’t like the consumerism and materialism of society. It was a cultural thing. None of us worried about jobs. When the revolution was over, we were all going to get jobs. This is very different. This is motivated by economic frustration, and economic fear, and a sense of economic exclusion. I think it’s much more classically anti-capitalist, or anti-upper class. The movement in the 60s was almost a reaction against too much prosperity, at least amongst some. And this is tough. This is tough.

JASON HARTMAN: It is, it is. And I think we have to consider maybe a more protectionist approach. Tariffs. I don’t know. But the whole world cannot equalize their wages in just a short amount of time. There’s just way too much fallout. But we’ll see where it goes. Roger Lowenstein, thank you very much. The book is The End of Wall Street. Roger, do you have a website to give out? The book is getting great reviews on Amazon, by the way.

ROGER LOWENSTEIN: No, but the book’s available Amazon, Barnes and Noble, and wherever fine books are sold. So….

JASON HARTMAN: And this is a fine one. Thank you so much for joining us today. Really appreciate the insights.

ROGER LOWENSTEIN: Jason, it was a real pleasure.

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Transcribed by David

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