The American dream is durable. And there was something about living in a delivery van that made Arielle Metzger and her brother, Austin, believe in the dream all the more. “It’s an adventure,” fifteen-year-old Arielle told me. “Yup, that’s how we see it,” her thirteen-year-old brother added. In 2011, the Metzger kids were on an adventure of homelessness. Many Americans were on the same, unfamiliar ride. The years after the Great Recession set a record. Never before had unemployment been so high for so long.1 Families who lost their homes to foreclosure moved into twenty-dollar-a-night motels. There were so many of these families in Orange County, Florida, that school bus routes had to be redrawn to stop at motel parking lots where kids lined up before dawn. As those families slipped to the end of their savings, they lost their grip on the cheap motels and resorted to their last refuge—keeping up appearances by day, sleeping in their cars by night.
My extraordinarily gifted 60 Minutes producer, Nicole Young, traveled to central Florida to spend long days and nights speaking to families in homeless shelters and knocking on windows of lonely cars in Walmart parking lots. Nicole is a courageous producer—among the best to grace the pages of 60 Minutes. She’s been by my side in the war zones of Afghanistan, Congo and South Sudan, but it is her compassion that makes all of her stories unforgettable. Nicole is tireless when she hears the voice of the suffering. That’s how she found the Metzger kids and their widower dad, Tom. Arielle and Austin had been living in the 1970s model GMC truck for five months. Tom bought the truck on Craigslist, with his last $1,000. The GMC was weary after a long career. It was a faded lemon yellow “box truck” with a roll-up rear door, the kind that might have been captained by a milkman in a previous life. Jobs for carpenters like Tom were obliterated by the mortgage meltdown. But his skills came in handy. In the cargo box, he built fold-down bunks for the kids and shelves for storage.
When I met the family, Austin sat on the front bumper, a slender boy with noncompliant brown hair. Arielle stood next to him with her blond hair pulled tightly back revealing shining blue eyes. Five months on the road made them wise beyond their years. I asked, “When kids at school ask you where you live, what do you tell them?” Austin spoke up: “When they see the truck they ask me if I live in it and when I hesitate they kind of realize. And they say they won’t tell anybody...” Arielle finished the thought: “Yeah, it’s not really that much of an embarrassment. I mean, it’s only life. You do what you need to do, right?”
With the help of Beth Davalos, an advocate for homeless children in the Seminole County school system, Nicole Young found dozens of families living in cars. These families had discovered that homeless shelters had waiting lists and shelters are typically segregated—one for women and children, another for men. Living in the car kept the family together. The Metzgers had a well-worn routine common to many of the families I met. In the morning, they drove to a gas station so the children could use the restroom to wash their hair, brush their teeth and change clothes. Veterans of homelessness know it’s best to rotate among gas stations so the managers don’t get sore. Next, the family joined the drop-off line at school. Appearances are essential. If the school or the cops figure out the kids are living in the car, there’s a chance the state will take them away. After school, the parent behind the wheel looked for a well-lit parking lot where the car wouldn’t draw anyone’s notice. One dad told me he liked to park outside hospital emergency rooms; they were busy, an overnight car wouldn’t attract attention and they were reasonably secure. Another father told me, each night, he sat on a cooler next to his car watching over his wife and children, longing for the glow of another day. Before the Great Recession, fourteen million children lived in poverty nationwide. By 2011, there were sixteen million.2 The counties around Disney World and Orlando, otherwise known as “The Happiest Place on Earth,” were among those suffering the most. Just on Highway 192, the road to Disney World, sixty-seven motels housed about five hundred homeless kids. The government counts them as homeless if they have only temporary shelter. In Seminole County schools, one thousand students lost their homes.
“Who can tell me what it feels like to be hungry?” I asked middle schoolers at Castleberry School. “It’s hard,” one boy told me. “You can’t sleep. You just...wait. You go to sleep for like five minutes and you wake up again. And your stomach hurts and you’re thinking, ‘I can’t sleep. I’m going to try and sleep. I’m going to try and sleep,’ but you can’t because your stomach’s hurting.” Another boy described his stomach this way: “It’s like a black hole. And sometimes when I don’t eat, you can hear my stomach like it’s growling. You can hear it.” Another classmate, with tears rising, told me, “We have to sometimes take food from a church. It’s hard because my grandmother’s also out of work and we usually get some food from her.”
“It’s kind of embarrassing,” another girl said. “Because the next day, you go to school asking kids if they want this food, or if they want that. If they have cereal and they haven’t opened it yet, you go ask them if they want their cereal.”
After classes at Castleberry, Arielle and Austin Metzger jumped into their truck headed for the town library where they take advantage of the lights, computers and air conditioning. Arielle told me, “Before the truck, I always saw all these homeless people and I would feel so bad for them. And then as soon as we started living in the truck ourselves, I’ve seen even more. And I just feel so bad. And even though I’m homeless myself, I want to do as much as I can to help them get up, back on their feet.”
“You sound very adult to me,” I said. Her little brother interrupted, “She is. She likes to take over.” Not a bad thing, I thought, with such a brave outlook on hardship. Arielle continued, “Every time I see, like, a teenager or any other kid fighting with their parents or arguing with them, it really hurts me because they could be in my shoes. And, of course, I don’t want them to be in my shoes. But they need to learn to appreciate what they have and who they have in their life. Because it may be the last day they might have it.”
Families, approaching their last normal day, haunted Ben Bernanke. He was far from homeless himself but in the early days of the financial crisis, he did occasionally spend the night on a couch. In 2008, Bernanke was, arguably, the most powerful man in the world. In fact, the man who would have to save the world, if anyone could. So, it seemed like a hell of a thing for the chairman of the board of governors of the Federal Reserve System to have to sleep on the instrument of torture that passed for his office couch. As the nation’s top banking regulator, Bernanke could ill afford to go home. Banks were imploding around the clock.
People tended to appraise the fifty-four-year-old Fed chairman as courtly, nebbishy and shy. Every inch spoke of an academic in an ivory tower. Bernanke was bald with a stole of dark hair wrapped from temple to temple. His full beard had surrendered almost wholly to gray. He was a little shorter and a little rounder than he might admit to the mirror. But to assay Bernanke by appearances was a mistake. In 2008, when America had been clubbed in a dark alley by Wall Street, and Washington stood paralyzed in fear—action was essential. This perilous moment demanded audacity—the audacity to invent, to improvise, to gamble, the audacity to seize the moment before it was too late.
“The chairman does NOT do interviews!” The public affairs man at the Federal Reserve in Washington, DC, was laughing, laughing, at the absurdity of my call. He was right; chairmen of the Federal Reserve didn’t sit for interviews nor hold news conferences. A few words from the chairman could send markets on a terrifying Tilt-A-Whirl. Chairmen of the Fed inhabited a fortress of solitude on Constitution Avenue. They labored over compulsory congressional testimony precisely crafted to say nothing at all. The fact that the “chairman does not do interviews” was precisely why I wanted Bernanke on 60 Minutes. “The Fed is doing a lot of things it has never done,” I told the public affairs man as the world was plunging, eyes shut tight, into the Great Recession.
Few, including Bernanke’s Fed, foresaw the nightmare lurking in the American dream of homeownership. Trusted American financial institutions sold mortgages to people who could never repay them, just to generate banking fees. The more subprime homeowners they could scam, the greater the fees. The mortgage originators then moved the risky loans off their books with the help of Wall Street which packaged hundreds of thousands of subprime mortgages into massive, doomed-to-fail securities. To cover up the true nature of these bundled securities, the banks demanded the highest quality grade from investment rating agencies, AAA. The rating agencies obliged because their fees were paid by the banks that were demanding the ratings. With AAA ratings, these time bombs could be purchased by the most conservative investors—pension funds for example. Moody’s Investor Service, one of the major rating agencies, stamped AAA on forty-five thousand mortgage-related securities. At the time, only six private sector companies in the US enjoyed the same coveted rating. In 2006, Moody’s put its AAA stamp on thirty mortgage-related securities every working day. In the end, 73 percent of Moody’s AAA securities were downgraded to junk.3
These financial time bombs detonated in a chain reaction, maiming the giants of finance that helped create them: Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup, Wachovia, Washington Mutual, plus insurance giant American International Group.4 Confidence snapped. Banks stopped taking each other’s calls. Funding markets which keep America in motion by lending to businesses for a day or a decade seized like a hot engine drained of oil. Fear was so great that the interest rate on treasury bonds, backed by the “full faith and credit of the United States,” fell to zero. In other words, investors sought refuge in the safety of treasury bills knowing they would receive nothing in return.5 “That’s the equivalent of sticking money in your mattress,” Treasury Secretary Henry Paulson told me at the height of the crisis. Paulson was among those who understood that the seizure of financial markets in 2008 was a greater threat than the events that led to the Great Depression.
Everyone knows the Depression was set off by the market crash of October 1929, but everyone is wrong. It’s not that simple. The many causes of the Great Depression have vexed dissertation writers for generations. A radical new view came into focus in 1963 when economists Milton Friedman and Anna Schwartz indicted the Federal Reserve itself in their classic, A Monetary History of the United States, 1867-1960. To reduce their 860-page analysis to bullet points would do violence to one of the most significant achievements in the history of economics, so with that in mind, here we go:
1) In 1928, the Federal Reserve was worried about wild speculation on Wall Street. The Fed decided to mop up the oversupply of credit by selling government bonds to banks—thereby reducing the cash banks had on hand. Then, the Fed raised interest rates to the highest level in seven years. The Fed’s 1928 annual report noted with satisfaction, “There was no evidence of unfavorable effects of higher money rates on trade and industry.”6 But there would be. Tightening credit eventually triggered the collapse of a stock market that was inflated on borrowed money.
2) Panic! With no deposit insurance in those days, folks took their savings out of banks and stuffed cash into coffee cans. These “bank runs” effectively looted the banks and choked the supply of cash even more. Lending dried up. The Fed did nothing while 20 percent of all American banks failed.
3) Speculators took dollars to their banks and demanded gold. The Fed supported the value of the dollar by tightening the money supply even more.
4) The world went to hell in a handbasket.7
The Friedman/Schwartz theory that the Fed turned a garden-variety recession into a cataclysm caught the imagination of Ben Bernanke, a graduate student in economics at the Massachusetts Institute of Technology. Later in 1983, as a professor at Stanford, he expanded on the Friedman/Schwartz work with “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” Titles like that led me to hand in my pencil as a freshman economics major.
Bernanke’s early education in markets began at his grandfather’s drugstore on Main Street in Dillon, South Carolina. In high school, Bernanke was quick with numbers. Because calculus wasn’t offered in his school, Bernanke taught himself. When it came time for college, a friend recommended Harvard and Harvard obliged. The acceptance letter would thrill most parents, but not Bernanke’s mother. Cambridge was too far from Dillon and besides, she insisted, he didn’t have the clothes for Harvard. Somehow these obstacles were overcome. Bernanke dutifully returned to Dillon each summer to work up tuition payments as a waiter at a South Carolina roadside classic called South of the Border. The future chairman of the Federal Reserve wore a poncho while collecting salsa-stained tips to help pay for school. This eventually led to a PhD at MIT, an associate professorship at Stanford and the chair of the economics department at Princeton. I once asked Bernanke what he learned as a waiter. He told me, “I learned work is hard.”
By 2006, Bernanke was sworn in as the Chairman of the Board of Governors of the Federal Reserve. He was recognized as one of the world’s leading authorities on the causes of the Great Depression. This did not make Bernanke clairvoyant however. Just like the Fed in 1928 which saw “no evidence of unfavorable effects” from higher interest rates, Bernanke said in a speech in May 2007 that he saw “no broader spillover” emanating from the weakness in the subprime mortgage industry.8 He told Congress on July 20, 2007, “The downturn in the housing market, so far, appears to be orderly.”9 Eleven days later, the markets suffered the first shock. Two Wall Street investment funds containing subprime mortgages imploded.10
Through the Great Recession and its aftermath, I traveled the country listening to people in the struggle of their lives: the Metzger kids living in their van, sweatshop workers forging names on fraudulent mortgage documents and a few who thought suicide might be a way to cope with the end of ninety-nine weeks of unemployment benefits. I didn’t know Ben Bernanke, but I had a hunch that a man from Dillon, South Carolina, who trafficked in tacos to put himself through college, would welcome a chance to answer the questions I was hearing.
“Are we going to lose our home? What are we going to do for food? These are questions that you’d never think that you’d ask yourself and now they’re discussions in our home.” Mike O’Machearley was waiting for the layoff notice that would leave him unable to support four children and a grandson. He was a broad-shouldered, bearded, Mack Truck of a man who drove an employee bus at the sprawling DHL distribution center in Wilmington, Ohio. Every week, more employees were stepping off his bus with pink slips in their hands. You didn’t need an MIT PhD to figure, soon, DHL wouldn’t need an employee bus or bus driver. “They always say that when God closes a door, he opens another one,” O’Machearley told me as we sat in his kitchen. “We have faith he will.” Faith was about all that sustained O’Machearley and the town of Wilmington when I first pulled onto Main Street in December 2009. Christmas garlands were draped on neat little brick shops—small-town “mom & pops” with one picture window display case on each side of the door. The early twentieth-century lane was spotless. Rows of cars were parked diagonally along each curb. The movie theater, coffee shop and bookstore formed a classic scene of middle America. Wilmington’s Main Street would have caught Steven Spielberg’s eye.
Wilmington had long depended on its Clinton County Air Force Base for its livelihood. In the 1940s, the navy conducted secret balloon tests there, setting off panicked reports of UFOs. In the ’60s, the base was a launching point for nuclear bombers with navigation charts pointing to the Soviet Union.11 In 1972, the base was decommissioned and the town lost its economic engine. Rather than giving in, Wilmington and its twelve thousand residents promoted the vacant installation as an airpark. The overnight delivery company Airborne Express set up its national distribution center on the lattice of abandoned runways. Once again, the sky was the limit. One-third of all households in Wilmington were getting a check from Airborne and later from DHL, which acquired Airborne Express. After the Great Recession crash-landed, businesses around the nation made overnight delivery the first notch in their belt-tightening. When I arrived, DHL was laying off Mike O’Machearley and eight thousand of his co-workers. Wilmington was like every town I visited in the Great Recession: laid-off workers were worried about money but what they longed for was dignity. They found honor in an honest eight-or twelve-hour day. They missed the compassion of lending a hand to the men and women struggling next to them. “We could tell you what we did on a daily basis, but you wouldn’t believe it,” DHL cargo handler Keith Rider told me. We met in a classroom where he and two dozen other employees were learning about unemployment benefits. Rider reminisced, “You load boxes in a big container and it’ll weigh eight hundred pounds. You push it out the door through eight inches of snow and push it up on a barge. And we were idiots enough that we did it by ourselves! We worked as a team. You had a good friend right alongside you. You’ll never understand it, but we loved it.” Morris Deufemia cut in, “I remember people with scarves breathing through ice and just, unreal, their eyelashes frozen. I started in ’81 and when you worked, you worked.”
Mike O’Machearley had no problem with the “American Pact”—work hard, raise a family, start the kids on the rung above you. But, given his layoff notice, O’Machearley wanted to know where he could redeem his claim. After all, he figured, he had paid in full. “On November 2 of 2003,” he told me, “my son was killed over the skies of Fallujah [Iraq] in a Chinook helicopter that was shot down. He died with sixteen other soldiers.” O’Machearley was eager for work, not charity. He asked for opportunity, not entitlement. “I’m an old-school kind of guy,” he said. “Maybe like on Tuesday nights, we’re going to have ‘no electricity Tuesday nights.’ We’re going to light the oil lamps and play checkers and read books by candlelight and just talk to each other. Maybe we’ll become a tighter family through it.”
On another Main Street in another down-on-its-luck town, I sat down on the wooden slats of a metal-framed bench. The railroad severed the asphalt just to my left and the storefront behind me had once been the Jay Bee Pharmacy. The scene was warmly familiar to the man sitting next to me. His grandfather had emigrated from Eastern Europe, passed through Ellis Island and settled on this corner to open his drugstore. Ben Bernanke had come home to Dillon to show me his roots. In this time of crisis, the Federal Reserve chairman had granted my request to break the long-standing tradition of refusing interviews. “Mr. Chairman,” I asked. “I see we’re on Main Street, but many people feel that guys like you are tuned into what happens on Wall Street and you forget places like this.”
“I come from Main Street,” Bernanke protested, urging me to glance up at the sign by the traffic light that bore witness to that truth. “I’ve never been on Wall Street. I care about Wall Street for one reason and one reason only, because what happens on Wall Street matters to Main Street.” My hunch about the chairman had been right. During the months after I was laughed off the phone, Bernanke and his communications director, Michelle Smith, were developing a new theory. The Federal Reserve was a mystery to most Americans. But in March 2009, after the Dow collapsed 54 percent, after American homes lost 30 percent of their value and as unemployment and underemployment were rising to a combined 15.6 percent, maybe this was the time to throw open the shutters of the Fed’s marble palace.12
It is one of Washington’s ironies that the grand headquarters of the Federal Reserve was, itself, a Depression-era project aimed at creating jobs. The construction was undertaken by the Public Works Administration which was spending the equivalent of $110 billion (in 2017 dollars) on 34,508 schools, bridges, town halls, hospitals, airports and dams in all but three of the nation’s 3,071 counties.13 The PWA built New Deal icons including the Grand Coulee Dam in Washington State, New York’s Triborough Bridge and LaGuardia Airport, and Los Angeles International. For the Federal Reserve headquarters, the US Commission of Fine Arts, which reviews such things, approved a four-story white marble structure of “impressive dignity” directly across the National Mall from the Lincoln Memorial.14 Given lean times, it was felt that federal architecture should be classical but spare. In terms of the Fed’s facade, PWA might as well have stood for Purchased Without Adornments. Only an American eagle, motionless in marble, is perched atop the Federal Reserve’s austere entrance on Constitution Avenue. Inside, a two-story sunlit atrium is lined by two marble staircases which lead up to the governors’ boardroom. If you had been in the crowd October 20, 1937, you would have seen Franklin Roosevelt standing on the second-floor landing with a forty-eight-star flag suspended above. His leg braces were masked from those below by a blue Seal of the President flag draped over the banister before him. Roosevelt opened the headquarters that day as a monument to his revolutionary vision of the national banking system. The original Federal Reserve was inspired by the bank panic of 1907. After much debate, it was created by Congress to stabilize markets by managing the supply of money.15 You may notice that on every bill in your wallet “Federal Reserve Note” is engraved above the words “The United States of America.” The Fed was created as a system of regional banks with little central authority. But with the Great Depression, Roosevelt signed the Banking Act of 1935, which concentrated control in Washington. The new board of governors was appointed by the president. The Fed became centralized, nimble and muscular. The day he opened the headquarters, the sound of the president’s words reflected off the lobby’s travertine. He defined the mission of his new Federal Reserve as providing “the greatest attainable measure of economic well-being, the largest degree of economic security and stability.”16 It would be seventy-three years before the extraordinary powers granted to the Fed would be needed to fend off catastrophe.
In the spring of 2008, nothing was well, secure or stable. Bernanke and his Federal Open Market Committee (FOMC) of Federal Reserve bankers had been slowly reducing interest rates as unemployment rose. But the time for traditional, measured action was about to end. One of Wall Street’s storied investment banks, Bear Stearns, was hours from failure after suffering losses on its mortgage-backed securities. The firm was pushed to the brink when rumors caused Bear’s trading partners to cut its sources of funds. Bernanke worried panic would trigger a cascade of collapsing financial giants so he invoked an obscure emergency clause in Roosevelt’s Federal Reserve Act. The clause known as 13(3) had never been activated since the 1930s. It allowed the Fed, in times of emergency, to loan not just to customary commercial banks but to “any participant in any program or facility with broad-based eligibility.”17 In other words, just about anyone. During the Bear crisis, Bernanke announced the Fed would add investment banks to the usual commercial banks that were eligible for Fed loans. In a historic departure from normal practice, Bernanke agreed to accept mortgage-backed securities as collateral. This put the mortgage investments that no one wanted on the Fed’s balance sheet. In exchange, the Fed put solid US Treasury securities into the banks. In a sense, it was a perfectly legal and altruistic form of money laundering. Mortgages with a soiled reputation swapped for squeaky clean Treasury securities. Bernanke reasoned that the Fed could hold the mortgage-backed securities for years if need be and sell them at a profit when the market recovered.
Adding teetering investment banks to those eligible for Federal Reserve loans required Bernanke to trigger 13(3). But he kept that quiet. He told his board he feared that publicly invoking the emergency rule would result in “self-feeding liquidity dynamics”—which was Bernanke-speak for panic. The expanded lending was unprecedented but it was also too little, too late. In effect, Bernanke was waving a fire extinguisher in the middle of a panicked stampede for the exits. The theater was not yet engulfed in flames, but as Bernanke feared, “self-feeding liquidity dynamics” were like gasoline.
On September 7, 2008, the Bush administration was forced to seize control of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).18 19 The two failing finance companies held nearly 44 percent of all residential mortgages, which added up to $5.3 trillion.20 That emergency takeover, on Sunday, was the start of a harrowing two weeks when pillars of finance crumbled one after another. On September 14, America’s largest retail brokerage, Merrill Lynch & Co., was rescued in a fire sale to Bank of America. The next day, 164-year-old Lehman Brothers, Wall Street’s fourth-largest investment bank, collapsed. Its demise was the largest bankruptcy in US history at $639 billion.21 The day after, September 16, Bernanke faced a threat he believed was greater than all the others. The world’s largest insurance company, American International Group, was insolvent.22 AIG held $1 trillion in policies in 130 countries.23 It was one of the few companies in America granted the highest credit rating, AAA, by both Moody’s and Standard and Poor’s.24 But unknown to Wall Street, the global colossus had done the unforgivable. It recklessly insured billions of dollars in those worthless mortgage bundles, then it failed to increase its reserves to cover the potential losses.25 The insurer which was supposed to make investors whole in case of default was effectively broke.26 Because AIG was an insurance company, not a federal bank, it shouldn’t have been Bernanke’s problem. But the Fed chairman understood that every major financial firm could be devastated by billions of dollars in losses that were now uninsured. Bernanke could not hold his temper as he cut AIG a check for $85 billion. This would turn out to be just a down payment. “Of all the events and all of the things we’ve done in the last eighteen months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG,” he told me. “Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system.”
“It makes you angry?” I asked.
“I slammed the phone down more than a few times on discussing AIG. I understand why the American people are angry. It’s absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole US economy.” Bernanke may have had no choice but in the bargain, he made the bailout as painful as possible for AIG, its board and its shareholders. In return for the taxpayer rescue, 79.9 percent of AIG would be owned by the people of the United States.27
The day after the AIG rescue, the Dow dropped 449 points. Over the months, the index had lost 23 percent of its value compared to the year before. Bernanke told me, “In that period, I thought we were pretty close to a global financial meltdown.” Bernanke had said publicly at the time that the debacle was the worst financial crisis since the Great Depression. But that was not what he believed. Privately, he thought the crisis was “almost certainly the worst in human history.”28
Separately from Bernanke’s action, the Bush administration quickly cobbled together a $700 billion plan to purchase toxic assets of financial firms. I was in the office of Treasury Secretary Henry Paulson as his team drafted the legislation. I noticed Paulson had Al Capone’s revolver in a frame on his office wall. The Chicago mobster was disarmed by Treasury agents who arrested him on tax evasion charges. On Capitol Hill and among the public, the idea of a taxpayer bailout of Wall Street was about as popular as a raid at a speakeasy. I wondered whether the treasury secretary would need the six-shooter to get his bill passed. Paulson was the former chairman of Wall Street’s Goldman Sachs.29 Goldman was one of the firms dealing in rotten mortgages.30 “We’ve got to get this up to [Capitol] Hill quickly,” Paulson told me. The legislation would put Paulson in charge of the largest bailout in American history. He kept the draft to three pages. “We’ve got to keep it simple, very simple,” Paulson told me. “So this is only about recapitalizing our banks and financial institutions.” Paulson continued, “Scott, the last thing in the world I wanted to do is go up to Congress asking for these kinds of things. It is a terrible position to be in. The only thing worse is the alternative.” Paulson and Bernanke were shouting “Mayday!” But members of Congress who did not represent Lower Manhattan could not see what this had to do with them. “I was addressing a caucus of congressmen,” Bernanke told me. “And one congressman said, ‘Mr. Chairman, I’m talking to bankers in my town. I’m talking to shopkeepers in my town. And they say things are normal. Nothing’s going on. We don’t see any problem.’” Bernanke paused for effect. “I turned to him and I said, ‘You will!’” In a meeting with Speaker of the House Nancy Pelosi, Secretary Paulson emphasized the emergency with a gesture some thought was a joke and others believed was a sign of desperation. In an interview, I said to Speaker Pelosi, “I understand Secretary Paulson kneeled down and begged you to move this bill forward.”
“Well, Secretary Paulson injected a moment of levity into the conversation,” Pelosi told me.
“Levity on one knee?” I replied.
“He said, ‘Please, please, I beg you, don’t blow this up.’”
I asked Paulson about his view from the waistline of the speaker of the house. “There was a lot of tension and frustration,” he said. “I wanted to break the tension. There was some shouting going on.” A taxpayer bailout had the whole country shouting. I said to Bernanke, “You know, Mr. Chairman, there are many people who say, ‘To hell with them. They made bad bets. The wages of failure on Wall Street should be failure.’”
“Let me give you an analogy,” he said. “If you have a neighbor who smokes in bed, he’s a risk to everybody. Suppose he sets fire to his house. You might say to yourself, ‘I’m not going to call the fire department. Let his house burn down. It’s fine with me.’ But what if your house is made of wood? What if the whole town is made of wood? The right thing to do is put out the fire first and then ask, ‘What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn’t happen in the future?’ That’s where we are now. We have a fire going on.”
On September 29, 2008, the House of Representatives debated Paulson’s bailout. In offices across the country, investors turned from the southerly red arrows on their Bloomberg Terminals to watch C-SPAN. It was a foregone conclusion that the bill would pass. There was no choice. But the tone from the House chamber began to sour and so did the stomachs of those watching. The rescue of America’s crooked banks was defeated by a slim bipartisan majority. Investors stampeded. The Dow Industrials dove 777 points. Seven percent of its value—1.2 trillion dollars—was vaporized in a day. At the time, it was the largest point loss in history.31 As bad as it was, the Dow was just a barometer measuring the storm battering American families. The economy began losing jobs at a rate of 741,000 a month. The unemployment/underemployment rate was headed to 17 percent.32 Household net worth fell 20 percent, about $13 trillion nationwide. For comparison, household net worth declined only 3 percent in the Great Depression.33 At that moment, one man in Washington had the authority and the audacity to act. Ben Bernanke did not need to debate or dither. He did not need the approval of Congress. The Federal Reserve is as independent of the deliberations and vanities of Washington as a government institution can be.
Like pouring water on a melting nuclear core, Bernanke flooded the banking system with cash and credit. He lowered the interest rate the Federal Reserve charges banks to zero. His team used the Fed’s emergency authority to dream up thirteen massive lending programs that had never existed before.34 He loaned troubled banks $1.6 trillion.35 Then, over a period of years, he directed the Fed to purchase more than $2.5 trillion in mortgage-backed securities.36 The Fed became the lender of last resort not only to America’s financial system but to the world’s. Because the dollar is the international currency of trade, Bernanke made sure central banks in fourteen foreign countries had plenty of greenbacks to lubricate commerce. Where did the money for these programs come from? Much of it he simply created. Bernanke directed the Fed to go online and add digital money to the accounts of the failing banks. He explained it to me this way: “The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. So, it’s much more akin, although not exactly the same, but it’s much more akin to printing money than it is to borrowing.”37
“You’ve been printing money?” I asked.
“Well, effectively. And we need to do that, because our economy is very weak.”
Critics warned against his aggressive interest rate cuts. Members of his own board complained he was moving too fast to hear their advice. Others believed he’d made a colossal mistake bailing out AIG. That criticism grew louder as AIG’s abyss grew deeper. The US Treasury was forced to kick in another $49 billion to the AIG bailout. By the time it was over, taxpayers lent AIG more than $160 billion.38 But Bernanke continued to expand the money supply in every way he could imagine—precisely the opposite of what the Federal Reserve Board of Governors had done in 1928. He was also dead set on avoiding the Depression-era Fed’s other blunder. To that end, he made a pledge on 60 Minutes. Bernanke explained the Fed was examining the books of all major banks, so I asked, “Are you committing in this interview that you are not going to let any of these banks fail? That no matter what their balance sheet looks like, they are not going to fail?”
“They are not going to fail,” he declared flatly.
Not one more major bank would be allowed to collapse, but Bernanke emphasized, if a destitute bank had to be dismantled, the Fed would prop it up until it could be “unwound” in a safe and orderly way.
In those easy days before the crisis, the Federal Reserve maintained a steady, boring balance sheet with a fairly constant $800 billion on loan to banks at any given time. After Bernanke’s host of emergency actions, the Fed’s loans outstanding were $4.5 trillion.39 Bernanke was certain he had learned the lessons of the Great Depression. But there was a risk that his unprecedented aggressiveness would set off runaway inflation. There were harsh lessons of history in that too.
Nearly three hundred years before, the French monarchy was devastated by one of the first stock market bubbles. Shares in what was known as the Mississippi Company became wildly inflated by fraudulent tales of riches in the French colony of Louisiana. It didn’t help that the man behind the Mississippi Company, John Law, was also managing the French economy for the Regency under Louis XV.40 In 1718, Law invented the first paper money in an experiment to revive the French economy. When his Mississippi Company began to collapse, he tried to support the plummeting shares by printing money—a lot of it. Unfortunately, the pit had no bottom. Panic ensued. There were bank runs—literally “runs”—in which people were trampled to death.41 The collapse and lasting economic damage were among the events that laid the path to the French Revolution, seventy years later. Bernanke was playing with fire to extinguish the fire consuming the economy.
In October 2008, Congress returned to Hank Paulson’s $700 billion emergency bailout and passed it on a second try. This gave Paulson, Bernanke and Sheila Bair, the Chair of the Federal Deposit Insurance Corporation, vital tools to restore confidence in the financial system and restart the heart of the economy. But investors remained unconvinced. Days after the bailout passed, the Dow Jones Industrial Average dropped into freefall. On October 9, the index fell 678 points. On October 15, it lost 733 points. That second week of October, the Dow lost 18 percent of its value—its worst week in its 112 years.42 The history of the Great Recession records that the Dow peaked at 14,000 in October 2007. By March 2009, it stood at 6,600. This was one of those extraordinary times, not unlike 9/11, when it seemed the future unfolding was not the future we planned.
From his office, Bernanke looked across American elms on the National Mall toward the marble memorial of the sixteenth president. “Let us, to the end, dare to do our duty as we understand it,” Abraham Lincoln had said.43 Ben Bernanke was daring to take the Federal Reserve in directions no one, perhaps not even Franklin Roosevelt, had imagined. Bernanke would not repeat the old mistakes. If he was wrong, at least his mistakes would be original.
Late in 2008, George W. Bush had four months left in the White House. He summoned Bernanke and Hank Paulson to the Roosevelt Room across the hall from the Oval Office. In his book, The Courage to Act, Bernanke recalled the grim president’s first question. “How did we get to this point?”44 A large part of the answer was fraud, on a vast scale, which 60 Minutes helped expose.
After the meltdown, banks were pursuing foreclosure on more than one million homes a year.45 One foreclosure notice was addressed to Lynn Szymoniak in Florida. It had been several months since Szymoniak received notice of an interest rate increase from her mortgage holder, Deutsche Bank. She disputed the rate hike and refused to pay. Now, Deutsche Bank was suing to take the house. Her case would turn out to be, well, one in a million. The quibble over a percentage on a white stucco bungalow in Palm Beach would ultimately lead to an FBI investigation, a 60 Minutes investigation and the exposure of mortgage fraud by the banks that gave us the Great Recession.
Lynn Szymoniak did not look like a slayer of Wall Street dragons. When I met her at her threatened home, she was pleasantly graying, middle-aged and might have been mistaken for a retired grandmother. But Szymoniak was a lawyer, trained as a white-collar fraud investigator. More than that, she was angry. She had been in court for months. The lawyers seeking to throw Szymoniak out of her home were forced to admit that the mortgage documents that established the bank’s ownership were lost. Foreclosure was held up nearly a year until Deutsche Bank returned to court claiming the missing documents had been discovered. Szymoniak was suspicious. She had only to glance at the resurrected documents to see they were not just a forgery, but a forgery attempted by a moron. According to the miraculously recovered documents, Deutsche Bank filed for foreclosure three months before it had acquired ownership of the mortgage.
Oops.
These documents, “proving” the bank’s ownership, were signed, as required by law, by a bank vice president. Her name was Linda Green. Her signature meant that an officer of the bank had examined the documents and found them whole and sound. Szymoniak went online where the State of Florida posts public mortgage records. She discovered Linda Green was an extraordinary banker. Green’s signature validated tens of thousands of mortgage documents. And while the name was always the same, the signature varied widely. You might understand how Green’s hand might be shaky, however. According to the documents she signed, Linda Green was executive vice president of twenty individual banks, simultaneously. After meeting Szymoniak, I decided I had to find Linda Green.
In our 60 Minutes investigation, I worked with producer Robert Anderson who had built an enviable career with the legendary correspondent Mike Wallace. Our associate producer was Dan Ruetenik, a gifted and tenacious journalist. Dan burns a lot of shoe leather while reporting. He wore out a couple of soles tracking down Linda Green in rural Georgia.
Her modest home was in the woods with a couple of aging autos parked outside. Green and I stood beside her fence. She was camera shy, but otherwise more than happy to talk about her career as a prominent figure in the national mortgage industry. Green explained she was not and never had been a bank vice president. She told me she had been working as a shipping clerk for an auto parts supplier when her grandson told her about a job at a company called DocX. DocX occupied several rooms in an anonymous strip mall in Alpharetta, Georgia. Green’s supervisor at DocX explained that all Green had to do was apply her signature to endless reams of paper that crossed under her pen. What DocX liked most about Linda Green was her name. It was short, didn’t take too much time to write and it was easy to spell. So, her name was adopted by her many co-workers in what was a sweatshop assembly line for mortgage fraud on behalf of the most respected banks in America.
DocX had been invented by necessity. Wall Street cut a lot of corners when it created those mortgage-backed investments that triggered the financial collapse. Now, as the banks tried to foreclose, they discovered the legal documents behind the mortgages simply didn’t exist. In court, banks demanded that homeowners have all their paperwork in order. But when the banks could not prove they actually owned the properties, many resorted to forged paperwork to throw people out of their homes.
Chris Pendley was one of Linda Green’s co-workers. I asked him, “When you came into DocX on your first day, what did they tell you your job was going to be?”
“That I was going to be signing documents using someone else’s name,” he said.
I asked, “Did you think there was something strange about that in the beginning?”
“Yeah, it seemed a little strange. But they told us, and they repeatedly told us, that everything was aboveboard and it was legal.”
“And your previous experience in banking?” I asked.
“None.”
“In legal documents?”
“None.”
“You just had to be able to hold a pen?”
“Yes, hold a pen.”
“How many banks were you vice president of in a given day?”
“I would guess somewhere around five to six.”
“What were you getting paid for this?”
“I’m embarrassed to say ten dollars an hour.”
“That’s not much for a guy who’s vice president of five banks,” I observed.
“Yeah,” Pendley said with irony. “I was very underpaid for my status in the companies.”
Pendley told me each employee was required to sign three hundred fifty mortgage documents an hour. He estimated he inked four thousand a day. After Pendley signed “Linda Green” to each legal document, it was left to co-worker Shawanna Crite to notarize the paperwork. I was a little confused by this step, so I asked Crite, “What was the role of the notary?”
“We were to make sure that everyone on the document was who they said they were and notarize the documents.”
“But the people who were signing the documents weren’t who they said they were,” I said.
“Right.”
“So, if Chris Pendley was signing for Linda Green, you’d notarize that document.”
“Yes.”
“And you were told that was okay?”
“Yes.”
“What do you know now?”
“That it wasn’t right,” Crite confessed, stifling a laugh.
The actual Linda Green told me many of the bank “vice presidents,” whose signatures were required by law, were high school kids who needed gas money. We will never know how many thousands of American families were evicted from their homes by banks whose ownership claim was not worth the paper it was forged on.
When DocX was exposed, the banks claimed to be shocked. They had farmed out their foreclosure processing to a subcontractor called Lender Processing Services. Lender Processing Services owned DocX. LPS claimed it was unaware of the fraud until 2010 when it closed DocX. The only person to go to jail was LPS executive and DocX founder, fifty-six-year-old Lorraine Brown. Brown pleaded guilty and confessed to overseeing at least one million forgeries. A federal judge sentenced her to five years.46 After our 60 Minutes report, several states and counties started investigations and discovered many thousands of “Linda Green” forgeries lurking in the shadows far beyond the Sunshine State. The banks and LPS claimed to be victims of Lorraine Brown, but the Federal Reserve and other federal regulators didn’t buy it. The government declared ten firms had engaged in an unsafe and unsound mortgage processing scheme, including Bank of America, Citigroup, Ally Financial, HSBC, J.P. Morgan Chase & Co., MetLife, The PNC Financial Services Group, SunTrust Banks, U.S. Bancorp, Wells Fargo & Company and Lender Processing Services. Together, the firms represented 65 percent of the mortgage servicing industry and nearly $7 trillion in mortgage balances.47 In a settlement with the US Department of Justice, five lenders—Bank of America, Wells Fargo, J.P. Morgan Chase, Citigroup and Ally Financial—paid $5 billion in fines and committed to about $20 billion in refinancing and mortgage modifications for troubled borrowers. The judgment was the result of a suit filed by Lynn Szymoniak under the Federal False Claims Act. The Act allows private citizens to sue when they have evidence the federal government is being defrauded. It was created during the Civil War to stop profiteers who sold sick mules and faulty rifles to the Union Army. Szymoniak’s cut of the settlement was $18 million.
She kept the house.
Our stories on the Great Recession for 60 Minutes helped motivate a generous nation. When we introduced the families living in cars in Florida, donations of more than $5 million came in checks, large and small, to organizations for the homeless. One couple bought a home for Arielle and Austin Metzger to get them out of their truck. You know the names of this couple, but they would rather I not say. We reported that the collapse in home values meant the state of Nevada didn’t have enough tax revenue to sustain its only chemotherapy center for the poor. After our story, a philanthropist wrote a check to keep the clinic open. We profiled Remote Area Medical, which was founded to air-drop doctors into inaccessible parts of Africa. But in the Great Recession, RAM was setting up free clinics in America. The day after the story, a wealthy New Yorker bought RAM a new aircraft to replace its geriatric WWII cargo plane. Our stories about the struggle of Wilmington, Ohio, inspired Jon Bon Jovi to write his anthem of the Great Recession, “Work for the Working Man.” I have found, over decades, in disasters natural and manmade, all journalism has to do is investigate and report. Armed with reliable information, Americans always do their best.
We can never know what would have happened had Ben Bernanke not possessed the audacity to use his authority—some would say more than his authority—as chairman of the Federal Reserve. Another Fed Chair might not have recognized the similarities with the Great Depression. Another Fed Chair might have hesitated, waiting for political cover. Consider Bernanke’s results. After September 1929, the Dow fell for thirty-four months and lost 89 percent of its value.48 The 2007 market crash was arrested in seventeen months with a loss of 54 percent. The Great Depression lasted ten years. The Great Recession lasted one and a half.49 Even so, the recovery was the slowest, flattest on record. My favorite measure of unemployment is what the US Bureau of Labor Statistics calls the U6 rate. U6 counts every unemployed person looking for work, plus everyone who is working part-time because they can’t find a full-time job. The U6 rate peaked at 17.1 percent in April 2010. It took eight years to fall to 7.5 percent in September 2018.50 Despite the slow recovery, Bernanke’s investments turned out to be shrewd. All of the Federal Reserve’s loans were repaid. The mortgage-backed securities recovered. As of 2018, the Fed was still holding trillions of dollars of these securities which produced billions of dollars in profit which the Fed returned to the US Treasury.
On his office balcony at the Federal Reserve headquarters, I stood with Ben Bernanke admiring the view of the Lincoln Memorial. I was intrigued by the storylines of two modest, small-town boys, self-taught, self-conscious of their clothes, who acted with audacity to rescue the nation, each in his way. It would be a mistake to overdraw the comparison. Lincoln’s achievement, saving the Union and abolishing hideous slavery, can never be matched. But to the Metzger family living in an old yellow truck, or to Mike O’Machearley, who asked how he would feed his family, both men may be remembered as heroes who “dared to do their duty.”