When a prestigious investment firm went up in smoke it set off a financial chain reaction unprecedented in history: The government bailed out banks, an insurance giant, and the American auto industry; millions lost jobs, savings, and their homes as the economy plummeted; and the real truth about America’s debt and deficit left some Americans thinking that we would never dig out of the hole. That was two years ago and the country is reeling from it.
In her new book, The Weekend That Changed Wall Street: An Eyewitness Account (Portfolio, $26.95), Maria Bartiromo, who covered the events of that September for CNBC from the floor of the New York Stock Exchange captures the drama of that time but also takes us to today’s doorstep, where a sluggish economy, high unemployment, fear of rising health care costs and enormous uncertainty about the country’s direction are the concerns of the day. The Fiscal Times spoke with her a few days ago about Wall Street, Main Street, and where we’re headed.
The Fiscal Times (TFT): Looking back now, what is your view of those who worked furiously to keep the financial system afloat, to do what they could in the face of crisis?
Maria Bartiromo (MB): I'm very happy, as a proud American, about the people we had at the wheel. I think that they did a good job. Hank Paulson, Tim Geithner, Jamie Dimon, all the executives — for the first time, probably ever, put down their competitive juices and their MO to kill each other and win in the name of making money, and they actually said, let's figure out how we're going to save the system.
TFT: You believe that we won’t be able to avoid another September 2008, and clearly this goes beyond the players at the table. Tell us why.
MB: As a society, we're optimistic. In my career I've seen several busts and booms. But think about what happened with housing back in 2005-2006. And pick any city – Phoenix, let’s say. Housing prices in Phoenix were up 40 percent year over year. Was the infrastructure there any better? No. Were the schools there any better? No. There was no fundamental change that warranted a 40 percent increase in the price of a home. It was just this mania that told us all to buy, buy, buy, that there's an urgency going on and we need to be part of it. We threw away fundamentals, and one of the lessons learned should be, if it looks too good to be true, it probably is.
TFT: Which is a lesson this country still has to keep learning…
MB: Yes, but I don't think we necessarily will. Free markets are messy. I’m a free market capitalist through and through, but I still think that it's not all black and white. Sure, I think we can have guardrails in place to ensure that capital levels are high, that banks have enough reserves, that leverage ratios are low. But I don't think we'll be able to avoid another crash.
TFT: So if it’s going to happen again, are we better prepared for it and in a better place than we were before – or not?
MB: Maybe. But you would've thought we'd be in a much better position after the Internet bust. And we weren't. It was just a different bubble of a different ilk. Who knows what the next one will look like? Maybe it's Treasuries. Maybe it's commodities. But it’s good to be a skeptic. We should be poking holes in some tires.
TFT: What’s the lesson today for all the recent college graduates who still can’t find jobs – or even unpaid internships, for that matter?
MB: A college student today should learn from the past and learn from the mistakes others have made. Look to the future and know that you have a whole lifetime ahead of you to come back stronger. And recognize that it’s a small world but also a world full of opportunity, and that the U.S. is not the only game in town anymore.
Right now there are skill sets that are required to not only survive but thrive in the new normal. That new normal means lower growth levels in the U.S., tremendous population growth outside of the U.S., and demand for all sorts of commodities, like oil, gas, steel, iron ore, and gold, as well as soft commodities like water, agriculture, food. Things are changing so rapidly. The skill sets that we have relied on for decades may not be the ones we need going forward. Whole industries are turning upside down.
What does a steel worker know about making solar panels? Nothing. So it's important to recognize the areas that are growing, and try to understand why and how to contribute. The world is global, the markets are global, and everything moves so fast because technology has changed everything. It's a great time to be a student and to live a life that's diversified, global, and rich in opportunity. Just know that in the near term, you might not get a job.
TFT: Until very recently, this country wasn’t in the habit of gazing at opportunities outside its borders for its young.
MB: There are multi-national companies that have a foothold in places like Asia and Brazil. Brazil is on fire right now; I hear frequently from CEOs that Brazil is the place they want to be. There’s tremendous growth in the economy. I’m saying, Try to find a place or a way to capitalize on the growth outside of the U.S., whether it’s at a commodities trading desk at a Wall Street firm or as an engineer in a tech company.
TFT: You talk about the structural changes needed in our financial system. How do the events of two years ago inform this?
MB: What we all learned from the financial crisis is that debt is bad. You cannot borrow forever, and if you keep borrowing, it comes back to haunt you. That's one of the reasons we've got a 6 percent savings rate now, we've got new regulations, new rules requiring banks to hold more capital and lower leverage.
In terms of getting our arms around the debt, it’s not necessarily raising $65 billion dollars by raising taxes on the top 2 percent of earners in this country. Clearly, $65 billion is not going to make a dent in a $13 trillion debt. It's not just revenue, it's stopping spending. And given the fact that the majority of spending in this country is in entitlements, we need to restructure Social Security, Medicare and Medicaid.
TFT: What about those who say, ‘I’m going to retire at 62 as I’ve been promised my whole life – I’ve paid into it and I deserve it’?
MB: The demographics of our country have completely changed. We're living longer. Medicine and technology have enabled this. Yet the financials of supporting those people who retire has not changed. It doesn't make sense.
TFT: What is your take on financial regulation reform coming out of Washington?
MB: I'm unimpressed, frankly. Many of the main points of it have nothing to do with how we arrived here. We still have too big to fail. As far as proprietary trading, it makes people feel good to hear, O.K., my deposit money will not be used to trade and to make bets by the firms. But that, too, had nothing to do with how we arrived here. It’s just ridiculous that Fannie and Freddie weren't even addressed. And the fact that so many foreigners own our debt is terrible. This is the vulnerability we’ve we put ourselves into. It’s truly a time bomb waiting to happen.
TFT: Consumer protection agency: good idea or not?
MB: It’s a good idea. Even though some of it will end up being onerous for the banks, extra fees hidden in the fine print were ridiculous. We needed some policing there.
TFT: And executive compensation?
MB: Some of the numbers are mind-boggling. For someone to make tens of millions of dollars when that person has driven a company into the ground I think is criminal. I think pay should be tied to performance. But I don’t think it’s the government’s role to determine what the pay should be.
TFT: September hasn’t been a kind month, as we all know. What do we have to fear this September?
MB: We're in a very fragile period for the economy. Unemployment is going to be an issue for some time. Business managers are uncertain. They're worried about higher health care expenses in 2011. They're worried about higher taxes, and as a result they're not adding new heads to the payroll. So it's a vicious cycle. People worried about unemployment are not going to spend money. I think we have a slog to go, frankly. Is it a double dip? Who knows. Is it a depression, a recession? Who cares what we call it. The bottom line is, we're feeling down. Ten percent of the country is without a job. Business leaders are sitting on a record amount of cash, and they're not spending it in the United States. They're spending it in Brazil, China, India. As for the markets, they may actually trade up. I'm seeing some bullish signs, some money coming in.
TFT: And how important are the midterm elections, in your view?
MB: There is nothing more important than the midterms. If in fact we were to see the Republicans take the House, the market could rally, and that could make people feel richer, and that could perhaps give us a little boost.
Read an excerpt from The Weekend That Changed Wall Street by Maria Bartiromo:
The story of the financial industry’s collapse is still being written, but looking back, we can pinpoint the warning signs. Nobody was paying attention to the interconnectedness of all the industries. Problems in the housing market were viewed as severe, but people were talking about it as if were just the health of one industry that was at stake. Not true. The housing market was linked to the investment banks and ultimately to the newly globalized financial system, and when the thread was pulled, everything began to unravel.
Even those in the top echelon of the nation’s economy failed to recognize the looming crisis presented by subprime. Before he stepped down as Fed chairman, Alan Greenspan disputed suggestions of a housing bubble, calling it nothing more than “froth” in certain markets. Ben Bernanke, then chairman of the president’s Council of Economic Advisers and soon to replace Greenspan, told Congress that he believed the boom reflected positive aspects in the economy, like job and housing growth. Neither Greenspan nor Bernanke expressed any real concern that a housing bubble might be growing that could place the economy in peril if it burst.
The Weekend That Changed Wall Street by Maria Bartiromo with Catherine Whitney, © 2010 by Maria Bartiromo, is published by Portfolio/Penguin and The Penguin Group, New York, NY.
Additional Maria Bartiromo Links:
Maria Bartiromo Identifies 10 Winning Traits (The Fiscal Times)
Maria Bartiromo: The Real Secrets of Success (The Fiscal Times)
Maria Bartiromo: The Glass Ceiling: Cracked but Not Shattered (The Fiscal Times)
States Put Medicaid on Life Support as Budgets Fall Short (The Fiscal Times)