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U.S. Financial System Analyst; Home Mortgages Still a Problem for Americans; Costs of Higher Education Assessed

Aired September 14, 2013 - 14:00   ET


CHRISTINE ROMANS, CNN ANCHOR: Five years after the meltdown and the banks are back. Are you?

I'm Christine Romans. This is YOUR MONEY.


ROMANS (voice-over): Five years ago this week, America and the world marched to the edge of the economic abyss.

GEORGE W. BUSH, FORMER PRESIDENT: Major sectors of America's financial system are at risk of shutting down.

UNIDENTIFIED MALE: We did not mislead our investors.

ROMANS: The fall of Lehman Brothers nearly brought several of the world's financial institutions to their knees. Some like Bear Stearns disappeared forever. Others like Wachovia and Merrill Lynch were swallowed by bigger banks in sell-offs orchestrated by the federal government.


ROMANS: What a week. The bailout debate reaching a fever pitch form Wall Street to Capitol Hill to Main Street.

The crisis spread and morphed into a global freeze of credit that threatened the world with economic depression. Millions of jobs were lost, millions of homes foreclosed. Congress was presented with one choice and one choice only -- bail out those banks, the banks that got us into the mess in the first place. Sabre rattling from more oversight of the financial industry spread.

BARNEY FRANK, FORMER U.S. CONGRESSMAN: The problem here was not deregulation but non-regulation.

ROMANS: And regulate they did, thousands of pages of new rules in the form of the Dodd-frank Wall Street Reform and Consumer Protection Act. The bill proposed 398 new rules for banks, credit card companies and other financial institutions. But more than three years later, only w40 percent of those proposals have actually gone into effect, and not a single senior executive from any Wall Street bank faced criminal charges. Sure, there have been billions paid in fines, a new consumer watchdog in Washington, higher capital requirements imposed on the banks. NEIL BAROFSKY, PARTNER, JENNER AND BLOCK: A lot of the bad incentives that were baked into our system going into 2008 unfortunately are still there. So I think we're still in a very dangerous place.

ROMANS: Five years after panic took hold, is your money any safer?


ROMANS: We're going to answer that question. Ken Rogoff is a professor of economics at Harvard University and an expert on financial crises. Five years ago this week Lehman failed. About six weeks or two months before that collapse, Ken predicted a major American investment bank would fail. He saw it coming.

Rana Foroohar wrote this week's "TIME" cover story, "How Wall Street won five years after the crash. It could happen all over again."

Rana, let's talk about the crisis that happened here. It appears to be a crisis that was wasted, an opportunity that was wasted for change. Too-big-to-fail banks now are up to 40 percent bigger today than they were five years ago, depending on how you measure it. And you ask Americans how they feel. Americans sure don't feel safer. So how did Wall Street win?

RANA FOROOHAR, ASSISTANT MANAGING EDITOR, "TIME": Well, in a word, lobbying. There's been a tremendous amount of time and money on the part of the banks put against lobbying for Dodd-Frank rules to be watered down, delayed, made weaker. I mean, you know, the stat that only 40 percent of the rules have been written so far is very telling. Banks are complaining about rules that would require them to use only five percent of their own capital on risky deals, you know, when the rest of America wouldn't dream of borrowing 50 percent. So it's just really unbelievable five years on we have all these problems still in the system.

ROMANS: Are we safer, Ken?

KEN ROGOFF, PROFESSOR, HARVARD UNIVERSITY: We're safer at this moment. I think if you go back five years, we were on the brink and really we could have had a second great depression. It could have fallen apart. And the authorities, they did some imaginative, creative things, and we didn't.

But on the other hand, I completely agree with Rana that they were very timid. I think lobbying was a big issue, but I also think they're scared that if they rough it up too much, nothing will replace that.

FOROOHAR: I think you bring up a great point because in a way we did a great job of saving the banks and averting this catastrophic moment. What we did not do a good job of is making the underlying structural nature of the system safer five years on.

ROMANS: We were making up the rules as we went along. I want to go back. You said let's go back five years. I want to walk down memory lane. The people who fixed this crisis, they did not see it coming. Let's be honest. This is 2007. Listen.


BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: We do not expect significant spillovers in the subprime market for the rest of the economy or to the financial system.

HENRY PAULSON, FORMER TREASURY SECRETARY: This is happening against the backdrop of an economy which in other respects is very solid.


ROMANS: From that day, October 20th, 2007, just through the first two months of 2008, that solid economy that Henry Paulson, the treasury secretary, was talking about, take a look. The S&P 500 down 12 percent. Bear Stearns evaporates. In the first quarter of 2008, GDP, the economy, economic growth cratered 2.7 percent, and it was the start of the great repression. Here's Alan Greenspan then later explaining why he missed it.


ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: I was right 70 percent of the time, but I was wrong 30 percent of the time. And there are an awful lot of mistakes in 21 years.


ROMANS: Some of those very people who were helping us through the crisis are now going to be advising or helping Ben Bernanke and the big fed stimulus that we have seen. How do we know they're getting it right this time? If my plumber got it right 70 percent of the time, I wouldn't hire him again. These are the people telling us how to fix this mess.

ROGOFF: Well, first of all, I do agree, they're not doing it completely right. But also we don't face these things very often, once every 80, 100 years. There are a lot of things we don't know. There are people who say if you do what I said, if you just say spend a lot more money, if you did a lot more of this, everything would have been fine. If we hadn't let Lehman fail, everything would have been fine. We don't know. You certainly want continuity in the leadership.

FOROOHAR: We could start by paying regulators as much as your plumber gets paid, you know? That would help. There are a number of things we can still do. We can come up with a new system of how you pay credit agencies.

ROMANS: Restrictions on bank lobbying.

FOROOHAR: Exactly. The money culture in Washington, there are things we can do to curb that.

ROMANS: One of the things as we move forward, and why I wanted to walk down memory lane, we're going to have to taper. We're going to have to pull back the reins on all of this Fed influence in the economy. And we've never been here before. How do we know we're doing it right, Ken?

ROGOFF: We don't. It works well on my blackboard. I've been teaching it for 20 years. But it's a theory. It just hasn't been done, and we don't know what will happen. I must say, I'm not sure why they're doing it so soon given the high unemployment and continuing fragility in the economy.

ROMANS: So what is the biggest risk the economy faces right now? An economist yesterday told me the kindling has just started to burn. Taking away the Fed stimulus right now would be blowing it out. You agree?

ROGOFF: We don't know. I mean, I think it's fair to say -- I think it's early. I don't think they should be doing it so soon. But am I sure that everything's going to blow up? I'm more worried about Europe, China, emerging markets and some spilling over here. We'll see. But I don't think the end of the tapering is the end of the world, but I don't see why --

ROMANS: Meantime, the American people, when you ask the question are you safer today than you were five years ago, they don't think they were. They haven't recovered. Your cover piece says Wall Street won, the banks won. The American people don't feel like they won.

FOROOHAR: Absolutely not. And I think this goes to the disconnect between Wall Street and Main Street. If you ask the bigger risk to the economy right now, I don't think it's necessarily another Lehman- style blowup. The banks have offloaded a lot of the worst assets, and we have increased capital. It's the fact that the finance and the real economy are still disconnected. Banks are not doing what they were set up to do, which is loan money to real people and real businesses. They are off in the world of high-flying finance, and we need to re-moor them in the real economy.

ROMANS: How do we make them lend more?

ROGOFF: It's still held up by the government, I want to add. As you said, the government went in there and said you know what, we backed all these banks after the financial crisis. We think they're healthy now and we're never going to do it again. And if anybody believed it, they would fall apart.

ROMANS: I would say the most powerful person in the world is the Fed chief, Ben Bernanke. But he's going to be gone. Who's better, Yellen or Summers?

ROGOFF: I think they're both great. I don't want to sound like new Coke/old Coke, but I think they're both very good. They're both brilliant.

FOROOHAR: Old coke is better than new Coke.


ROMANS: But I need you -- so you're not going to -- professor will not pick a lane here because you're colleagues and friends, I'm sure.

ROGOFF: I'm friends with both of them, but I think they're both brilliant. Janet Yellen is just as brilliant as Larry Summers.

ROMANS: Hundreds of economies, however, say they would like to see Janet Yellen.

FOROOHAR: That's right. And I myself wrote a column saying I think she's the right choice for the moment. I agree with Ken, they're both brilliant economists. But if you think about this connection between finance and the real economy and who is best positioned to create that and to regulate the banking system, I think Janet Yellen's a great choice.

ROMANS: I sure don't want my Fed chief to be right 70 percent of the time. I know that's why it's called a dismal science.

ROGOFF: Try to find another country that's better.

ROMANS: I know. Nice to see you again. Thanks.

ROGOFF: Thank you.

ROMANS: Five years after the collapse of Lehman brothers, many everyday Americans are still struggling in this economy. But what about the very public faces of the men and women who ushered in the downfall and those who tried to fix it? Zain Asher joins us now with a look.

ZAIN ASHER, CNN CORRESPONDENT: Hi, Christine. You may, of course, remember Dick Fuld, the former CEO of Lehman Brothers. He led his company to the largest bankruptcy in American history. Five years on, like many Americans, Fuld has struggled to land a full-time job since the crisis. He launched his own financial advisory firm in 2009 and serves as an adviser to a green technology company. He made headlines again this summer after suing his ex-son-in-law for not paying back a $9 million loan.

Next up is Angelo Mozilo, the former CEO of Countrywide Financial, one of the largest subprime mortgage lenders in the country. Many people blamed him for issuing loans to people who clearly could not afford them. Now he's kept a low profile after being banned from ever running a public company.

Next up, Henry Paulson back in 2008 he was the treasury secretary. He made the difficult call to let Lehman Brothers collapse. Today Paulson heads up a think tank he founded in 2011 to promote a cleaner environment.

And next up is, of course, Timothy Geithner. Back at the time of the financial crisis he was running the New York Federal Reserve Bank. He, of course, went on to become treasury secretary. After leaving his post, he joined the council on foreign relations. He reportedly now rakes in hundreds of thousands of dollars for his speaking engagements. And next up is Elizabeth Warren. She was tapped in 2008 to oversee the $700 billion bailout program. She's now a senator from Massachusetts.

And what about you, the American consumer? Before the crisis, a lot of us were splurging on home loans we clearly could not afford. Many of us ended up out of work and in foreclosure. Five years on we're not borrowing quite as much, but we're not earning quite as much either. Christine?

ROMANS: Thanks, Zain.

Coming up, five years after the financial crisis, housing is slowly recovering. But break out the aspirin, folks -- why there's still a housing hangover in some spots. That's next.


ROMANS: Five years after the collapse of Lehman Brothers, America's housing market is improving. And every happy headline has a "but." Foreclosures have fallen year over year for 35 months in a row, but they're still happening with alarming frequency in some places. One in every 359 Nevada homes is in foreclosure. In Florida, it's one every 383. Home prices are up 12 percent from a year ago. But they're still 23 percent below the peak. Thanks to those rising home prices, 2.5 million more mortgage borrowers no longer owe more on their homes than the home is worth. But 7 million Americans are still under water.

And mortgage rates are very, very low right now. Still low, rising, but low. But for many of those underwater homeowners, they're stuck. I spent time recently with a small business owner who was left behind by this housing recovery.


ROMANS: The math on Katie's house is upside down. And her family is feeling queasy.

MICHAEL KAWULA, CAN'T REFINANCE HIS MORTGAGES: It makes us nauseous. We're paying almost $1,000 more a month than what we should be.

ROMANS: And 4.57 percent is the average right for a 30 year fixed mortgage. But the Kawulas aren't paying that. They have one mortgage over six percent and a second one that's even higher.

KAWULA: It's 11 percent.

UNIDENTIFIED FEMALE: It's 11 percent, 11.25 percent.

ROMANS: That's almost three times -- that's almost three times what is the going rate for a 30-year fixed-rate mortgage. So you haven't been able to lower these?

KAWULA: No. We've tried three times. ROMANS: They can't refinance because they owe too much. Banks generally won't loan or refinance more than 80 percent of a home's worth even if you're not a risky bet.

ROMANS: The rates are astonishing. And you've never been late on these?

UNIDENTIFIED FEMALE: Never. Early, actually.

ROMANS: Because their loans aren't backed by Fannie Mae or Freddie Mac, the family isn't eligible for president Obama's refinancing program known as HARP. And a universal re-fi option, something the president wants badly, would require new legislation.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Congress should give every America the chance to refinance at today's low rates.

ROMANS: Do you think that he'll be able to help you? That Washington is the answer here?

KAWULA: I've never found them to be the answer for anything as a business owner.

ROMANS: A business owner with few options.

BOB MOULTON, CEO, AMERICANA MORTGAGE GROUP: You have to live with it. You have to put money into it, or you have to sell.

ROMANS: The girls may be dancing, but mom and dad can't dance around this.

KAWULA: And $50,000 is what they're saying we need to give to them to be able to lower it. So I don't know if I want to part with $50,000.

ROMANS: They've even thought about walking away. Would it hurt your reputation as a small business owner?

KAWULA: Definitely.


KAWULA: There's no doubt about it. I recently sold a business and just opened another business. It's my name.

ROMANS: For now, they're staying put and feeling frustrated.

KAWULA: We've called our bank. She's called them multiple times to see what we could do. They won't even work with us.

ROMANS: And with mortgage rates creeping higher, families locked into high rates of the past may have missed a real opportunity for the future.


ROMANS: All right, impossible to refinance for people like the Kawulas, and soon harder to get a loan in the first place. Next year the government is expected to cut the maximum size of mortgages backed by Fannie and Freddie. That means you won't be able to borrow as much money and be covered. At the same time, new mortgage rules from the Consumer Financial Protection Bureau go into effect. Those restrict the types of mortgages lenders can provide. We'll be watching all of these developments closely here on "YOUR MONEY" to really help guide you through the changes in the real estate market.

Coming up, if you're buried under crushing student debt, help is out there. We're going to tell you how to get it next.


ROMANS: The next loan crisis is coming to a college campus near you. You've probably heard the student loan horror stories. It's only a small portion of borrowers, really, but it does happen -- 60, 70, 80, even $100,000 in student debt. Then graduation, and for some a low paying job.

We've talked a lot about the problem of the low-wage recovery on this show, but for students with high loan balances and low wages, there is a solution no one is talking about. The income-based repayment program gives borrowers a break, and that break is about to get bigger.

Here's how it works. Those with government-backed student loans can apply, then the government considers their income and their family size, then does some calculations and reduces monthly payments depending on the amount of the loan for those who qualify. But borrowers must reapply each year. The reduced payments won't be more than 15 percent of discretionary income. But thanks to a bill passed along with Obamacare, that amount will drop to 10 percent starting next summer. Imagine that, 10 percent of your discretionary income goes to student loans. That's it, 10 percent, cap there.

So if you've got a kid in high school or middle school, check this out and show it to them. It's not a long-term solution to rising college costs and ballooning student debt. Higher education still the gateway to the middle class, but that gateway is getting narrower every day. I spent time recently with a mother struggling to help her son step through that gateway.


PATRICIA RODRIGUEZ, STRUGGLING TO PAY FOR SON'S COLLEGE EDUCATION: I started saving when he was two. And he's 19, and it's never enough. Anywhere you can cut corners and save money.

ROMANS: Patricia Rodriguez needs $13,000.

RODRIGUEZ: Where do you get an extra $1,200 a month?

ROMANS: Don't you worry about borrowing all that money?


ROMANS: Reporter: Her son, Jason, is a sophomore at the University of Hartford, but Patricia's savings are gone.

How are you going to get it?

RODRIGUEZ: I don't know.

ROMANS: Nothing in American life has risen in price so quickly as the cost of college, up more than 500 percent since 1985.

STEPHEN MOORE, "WALL STREET JOURNAL": I think the universities are the biggest scam going in America. The costs -- there's no reason a college education should cost $30,000, $40,000, $50,000 a year.

ROMANS: Why is it so expensive? Some say the easy money available to students has created a tuition bubble. Others say it's simple economics.

RICK NEWMAN, COLUMNIST, YAHOO! FINANCE: You have to go to college to get ahead. At the same time, it's not as if new colleges are opening up all over. We basically have a fixed amount of supply, and when demand is going up and supply isn't, prices rise.

ROMANS: And so does debt. Grants and scholarships only cover about positive percent of college costs. So students have to find or borrow the rest. Two-thirds of college grads have loan debt now averaging more than $26,000. Others have much more.

RACHEL BOHR, COLUMBIA STUDENT: Right now I'm almost $60,000 in debt, which will affect my ability to get a mortgage, to have children and put them through a good education. And it will affect what kinds of jobs that I choose.

ROMANS: And jobs are what it's all about. Americans WITH a college education are more likely to be employed and they earn more money. But in this economy, there are no guarantees. More than 36 percent of recent grads are working in jobs that do not require a college degree.


ROMANS: That's why the country's most famous student loan recipient wants to hold colleges accountable.

OBAMA: What we want to do is rate them on who's offering the best value so students and taxpayers get a bigger bang for their buck.


RODRIGUEZ: He likes seeing his friends, but he does also have a great time being in college.

ROMANS: But finding the bucks in the first place, that's the real struggle for parents like Patricia.

RODRIGUEZ: All you want is your kid to go to school and do well, and that's what he's doing, and we don't have the money.

ROMANS: Few Americans will if college costs keep rising. (END VIDEOTAPE)

ROMANS: She's doing everything she can, and it's just running right out of her reach, just running away from her, the cost of college. It may be the beginning of the next crisis, but college is still worth it. You saw the numbers there -- lower unemployment rates and much higher wages. Salaries for the class of 2013 rose 2.4 percent from last year. That's according to a new order out this week from the National Association of Colleges and Employers. And the extra help from the government will hopefully make it easier for grads who need it.

Up next, what do James Bond, Victoria's Secret, and marijuana have to do with your money? I'm going to tell you next.


ROMANS: If you thought the worst of the sequester was over, think again. According to a new study from Goldman Sachs, the budget costs will cost another 100,000 federal jobs the next few quarters. Add that to the 71,000 lost in the past year. We're also seeing damage in other areas like personal income growth.

For more stories that matter to your money this week, give me 60 seconds on the clock. It's "Money Time."


ROMANS: From crisis to bailout to billions in profit, five years after the financial meltdown, the Citigroup bailout is officially over. And congratulations, taxpayers, you made a $15 billion profit.

Who replaces Ben Bernanke? It's widely thought to be a heavyweight fight between Janet Yellen and former treasury secretary Larry Summers. The latest haymaker, a letter signed by more than 300 economists urging president Obama to choose Yellen.

From fast food to Wal-Mart to women's underwear, part-time employees of Victoria's Secret flagship store in New York City joining the fight for more pay. The result, the secret is out. The workers won raises across the board.

The latest so-called hot investment could leave your portfolio up in smoke. Online offerings of stocks related to all things weed are everywhere. The federal regulators are warming consumers to be on the lookout for scams.

Remember this submarine car used in the James Bond movie "The Spy Who Loved Me"? Imagine the surprise for one lucky couple who found it in a storage locker they bought in a blind auction for just 100 bucks. The car sold at auction for $920,000.


ROMANS: Whoa, $920,000, that's a lot for most of us, unless you're a big-time NFL quarterback, say, like Peyton Manning, as you get ready to watch Eli and Peyton face off in the Manning bowl. Head to our blog for more about the business of being a famous NFL quarterback.

And coming up on "YOUR MONEY" tomorrow at 3:00 p.m. Eastern, are Americans exceptional? President Obama says so, but Russia's president, Vladimir Putin, disagrees. Tomorrow at 3:00 p.m. on "YOUR MONEY." Have a great weekend.