Merrill Lynch And The Mortgage Crisis

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Fresh Air
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Merrill Lynch And The Mortgage Crisis

TERRY GROSS, host:

This is Fresh Air. I'm Terry Gross. In our continuing attempt to understand what's going wrong with our economy, we invited back Gretchen Morgenson, a Pulitzer Prize-winning financial reporter and columnist for the New York Times. Last Sunday, she wrote an article that was a good case study on how mortgage foreclosures and mortgage-related securities have transformed Wall Street and led to the downfall of several institutions.

Headlined "How the Thundering Herd Faltered and Fell," her article examined how and why Merrill Lynch invested heavily in the mortgage industry and packaged mortgages into complex derivatives that were sold to investors. Merrill's performance was breathtaking until the housing market collapsed, and the derivatives became toxic. Merrill shares plummeted, and they were taken over by Bank of America in September.

Gretchen Morgenson, welcome back to Fresh Air. What did Merrill Lynch once stand for on Wall Street?

Ms. GRETCHEN MORGENSON (Journalist, New York Times): Merrill Lynch was, I think, the most iconic brokerage firm in that it dealt with the individual. It really was kind of the connection of Main Street and Wall Street. So you have a firm that was really known for its kind of individual investor care and individual investor advice, and that really was, I think, what Merrill Lynch was best known for.

GROSS: Its downfall was investing heavily in the mortgage industry, particularly in risky mortgages and derivatives. How did it start heading in that direction?

Ms. MORGENSON: Well, what happened was, Merrill Lynch executives saw that a lot of money was being made elsewhere on Wall Street and, you know, on Main Street for that matter among mortgage lenders. And Merrill saw these profits and really was envious of them, wanted to participate, saw it as a way to kind of overcome their rivals in a way that they had not yet been able to do.

In fact, there was a real fixation at the firm on Lehman Brothers, who was a very big fixture in mortgages and had set up an organization that really it was able to capitalize and profit in every step of the mortgage origination, packaging, and selling industry that had grown up. So, Merrill saw that, at Lehman, saw the immense profits that were being made and said, I want some of that. And so they went full steam to be a huge player in the mortgage market.

GROSS: You described Merrill as having created an assembly line that bundled and repackaged mortgages so they could be sold to other investors. What was the process of taking risky loans and repackaging them for investors?

Ms. MORGENSON: This was a process called securitization, which we have heard a lot about in the crisis because it has played a central role in extending the mortgage meltdown and making it as big as it is. Securitization was a process by which you take a pool of loans, and you bundle them together, and they are, of course, of varying risk level, i.e. some of the borrowers have a better financial situation than others. They have different interest payments that are going to be made each month. They are a variety of loans at the variety of aspects, OK.

You pool those together, and you bundle them. You sell pieces of them or slices of them, what is known as tranches of them, to investors. So the highest quality would sell to an investor who didn't want to take on too much risk, and then the lowest quality would sell to someone who was willing to kind of, you know, take a chance that the mortgages were actually going to pay off. And that is the securitization process, and that is what really made so much money for Wall Street during the mortgage boom.

GROSS: And these securities were the CDOs, the collateralized debt obligations?

Ms. MORGENSON: These securities included CDOs, which were collateralized debt obligations. They also included residential mortgage-backed securities pools. So there are a couple of different kinds, but the thing that really, really was Merrill's biggest mistake was to go so heavily into collateralized debt obligations.

GROSS: What are the advantages that these securities are supposed to have?

Ms. MORGENSON: They are supposed to spread out the risk associated with these loans. They're supposed to sort of hand-tailor the risk, i.e. if you're a pension fund that can only buy very high-quality securities because you are, you know, worrying about having to pay out on your pensioners' monthly pension checks, then you would really limit yourself to the high-end portion of the CDO or the best-rated portion.

So it was a way to diversify the risk, a way to sort of almost manage the risk, you know, a way that was very deceptive because it ended up actually not succeeding. And that was partially because of the rating agencies because they had failed to see that many of these loans were not quite as promising as they had initially thought.

GROSS: But these mortgage securities ended up amplifying risk instead of managing risk. Were the rating companies the only reason why these securities ended up creating more risk instead of containing risk?

Ms. MORGENSON: No. What happened was, these CDOs, as they were called, there were two types - one type had actual mortgages in them, and then there was a new sort of new-fangled version that was invented, which is called a synthetic CDO, or structured finance or structured CDO. What this was, was a way to get at the same type of a portfolio, but you actually didn't have to have the physical loans in the pool.

What you would do if you were creating one of these securities on Wall Street is, you would buy insurance on some of those loans and put the insurance policy in the collateralized debt obligation. So you didn't have to go out and buy all of the actual physical loans, pool them together, figure out the risk, slice them up, and then sell them to the investor. What you were simply doing is getting a contract from someone else, getting someone who agreed to write the insurance on those loans, writing that contract with that entity, and then putting that in the CDO.

This made the CDOs much quicker and easier to assemble and much more profitable to assemble because when you have to go out and actually buy the physical assets, that takes time, that takes money, and takes a capital commitment. And so, here was a way that Wall Street sort of figured out to have the outcome the same, but to make it in a way that was faster and way more profitable.

GROSS: Are those credit default swaps that you're describing?

Ms. MORGENSON: Yes. So, the CDO would contain credit default swaps that would reflect the performance of pools of mortgages.

GROSS: Again, the credit default swaps were designed on some level to help back up the risks. These are meant to be an insurance policy, but again, instead of minimizing risks, they created more risks. So, how did they backfire?

Ms. MORGENSON: It's interesting because this is again a situation that happens often on Wall Street, a security or an instrument like a credit default swap is devised as a way to hedge risk, it's a way to offset the risk that you might have in your portfolio. Originally, they were designed so that, if you were a bank or if you were a bondholder and you had a position in a company's bonds or you had made a loan to the company, you were at risk if that company were to fail.

How do you minimize that risk? How do you hedge it? What you did was, you would buy a credit default swap that referenced that entity or that loan or that bond. And there you would be basically hedged against the default of that particular bond. So what began, though, as a hedging instrument morphed into a speculative instrument, and people soon began to bet on the, you know, prospects for a corporate loan, for a corporation, for a pool of loans, for a pool of mortgages.

And so, what happened was, the CDO structure, that included credit default swaps, made the investors' holdings that reflected on those mortgages far far larger than the underlying mortgages themselves. So, you have that situation where let's say there were 10 mortgages made, but now, you have CDOs that are based upon those 10 mortgages, but the CDOs have a value of maybe 100 or 1,000. So you have far more credit default swaps than you do the underlying mortgages that they're supposed to reflect the performances of, and that amplified the risk.

GROSS: So, when the mortgages turned out to be faulty, then there's a whole lot of people who are losing money.

Ms. MORGENSON: A whole lot of people who are expecting payment, right, from the insurance that they bought to forestall against that problem, and a whole a lot of people who wrote the insurance thinking that there would never be such a problem.

GROSS: And they didn't necessarily have the money to pay out if there were such a problem, so...

Ms. MORGENSON: Correct.

GROSS: Since there wasn't really the money to back up the insurance kind of instruments that were out there, what were the consequences when mortgages started to fail?

Ms. MORGENSON: Well, then you would have a situation like AIG. AIG was one of those companies that did write an awful lot of this insurance. Now, they're an insurance company, so you'd think that they would know what they were doing, but they believed that these mortgages were not going to fail.

However, even though maybe they haven't yet failed but they're declining in value, they had to put up more collateral to the people who had bought the insurance. And so, that is what caused AIG to go off a cliff. So you have a circumstance where an insurer, in this case AIG, but there were many, many entities that wrote this insurance who isn't well capitalized enough to pay out on the insurance should it come due, and that's the problem.

GROSS: So AIG was heavily invested in the credit defaults swaps?

Ms. MORGENSON: They wrote a lot of the insurance. That meaning that they agreed to insure the mortgage portfolios for the people who either were betting, you know, that they were going to fall and would capitalize on the insurance that way or were hedging their existing positions in those mortgages. AIG wrote a lot of insurance, and that is the single reason why the taxpayer now owns AIG.

GROSS: So when Merrill Lynch was doing well and their collateralized debt obligations that they had created were doing well, how did their place on Wall Street change? Like what did that do for them on Wall Street?

Ms. MORGENSON: It was a great for them because for years, Merrill had been sort of the laggard behind Lehman Brothers, behind Goldman Sachs. It was a moment of triumph for them. I mean, they were taking a victory lap. It was - Stan O'Neal was the chief executive. He had fashioned this approach that, you know, we were going to take on the competitors and beat them at their game, you know. So for 2006 and for half of 2007, Merrill Lynch was in clover. They were doing very well. The numbers there were phenomenal.

GROSS: Who created the credit default swaps and the collateralized debt obligations, these fancy instruments that have gotten us into so much trouble?

Ms. MORGENSON: Well, the credit default swap really was born back in the early '90s at Bankers Trust. But the group that put together credit default swaps and sort of the synthetic CDO idea, where the credit default swaps are in the collateralized debt obligation, that really grew out of a group of elite bankers at JP Morgan in like 1997-1998.

Now, they designed it for the purposes of their own bank's lending. So JP Morgan loans money to, say, General Electric, Procter and Gamble, you know, blue chip companies, but JP Morgan is always in the background fearful that maybe the company is not going to do as well as it ought to, and maybe that loan that it has made to that company is risky or will grow more risky in the coming years. So how can we hedge that? How can we offset that risk?

And so they devised this way to design a security that would allow them to hedge that risk because before that, it was very difficult to hedge a bondholding. You would have to go into the marketplace, find an investor who would loan you the physical bond, borrow the bond. You then had to pay the coupon on the bond. It was a very labor-intensive and expensive enterprise to borrow a bond, to hedge your position, and sell it short.

So this was a way, a mechanism to do that that didn't involve all of that rigmarole and didn't involve those costs. And so it was fine. It was a fine security, and the, you know, the structure of it was not a problem when you had loans or debts in it that were transparent, i.e. General Electric. People know the company. They can analyze whether its debt is money-good.

But when you start piling mortgage securities in here - mortgages, home loans, a thousand loans from a variety of different places, a variety of different borrowers with, you know, some more credit-worthy than others, that makes it an entirely different scenario that is much more opaque and difficult to see through, difficult to understand.

And so these investors relied very heavily on the rating agencies to tell them which parts of the security was risky versus those that were less risky. And so it was an opaque series of securities that were in these CDOs that made the problem.

GROSS: If you're just joining us, my guest is Gretchen Morgenson, and she's a financial reporter and columnist for the New York Times. In Sunday's paper, she wrote a kind of case study in the economic crisis by profiling the fall of Merrill Lynch. We're going to talk more about that after we take a short break. This is Fresh Air.

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GROSS: My guest is Gretchen Morgenson. She's a financial reporter and columnist for the New York Times. In Sunday's paper, she did a portrait of the fall of Merrill Lynch, looking at that as a kind of case study into how we got into the economic crisis that we're in.

Let's get back to Merrill Lynch. And you were describing before how they got into the business of buying up mortgages and slicing and dicing them into the securities that they then sold. And you said that they really went on a big buying spree between 2005 and 2007, investing in residential and commercial mortgage-related companies and assets. What are some of the things that Merrill bought in those two years?

Ms. MORGENSON: Well, the biggest single purchase that I think that they made was to buy a company called First Franklin, which was a subprime-only lender, meaning a lender to risky borrowers that was owned by, I think, First National City, an Ohio bank. So they paid a billion three for First Franklin.

The deal closed in December of 2006. So it was really, really at the very last moment. That was probably the most expensive purchase of a mortgage lender that anyone made because then, 2007, we start down the other side of this mania. We start to go down the hill rather than up.

GROSS: Did the executives at Merrill Lynch really have no clue at this point about the potential fall - things going really bad?

Ms. MORGENSON: Well, I think that it's pretty clear that they did not understand what they were buying and what they were constructing. But I think the crucial mistake that they made was, when it became clear in 2007 that investors were starting to say no to some of these subprime mortgages, they were starting to say, oh, got enough here. I'm going to stop buying my sub - these subprime securities or even higher-rated mortgages.

There was sort of a moment where investors started to say no more. And yet, Merrill Lynch kept the machinery going. The assembly line kept chugging, and so they kept putting together these collateralized debt obligations and these packages of loans even though they were not able to sell them. And what that meant was that they had to keep them on their books.

GROSS: Why would they do that? Why would they keep creating more collateralized debt obligations when no one - when fewer people were buying them, and the tide was turning?

Ms. MORGENSON: It's possible that they thought that it was a temporary blip, that the buyers would come back into the market. It's also possible that they really enjoyed the fees that were associated with…

GROSS: Yeah, explain those fees and why those fees were so profitable.

Ms. MORGENSON: Well, when you would package these securities into a CDO, depending upon it's, you know, sort of risk level on the CDO, you could make 2.5 percent of the loan amount or of the total CDO amount in fees. And those fees were just gigantic. So that was a very appealing aspect to these things, you know, far greater than you would receive if you put together, you know, a pool of less risky assets.

GROSS: So when the CDOs started becoming toxic, what did that mean for Merrill?

Ms. MORGENSON: It meant that what they had on their books was never going to be able to be sold. They had actually tried to hedge some of these stakes, but they had chosen their hedging partners. They had chosen some very weak players, and it turned out that the hedges were really not going to work for them because the financial players that they had hooked up with were not able to really provide the kind of protection that Merrill Lynch needed to hedge its positions. So ultimately, what they were left with was a very enormous position, very nasty securities that they couldn't sell and that just kept declining in value.

GROSS: Declining until Bank of America took over Merrill Lynch. What did Bank of America's stand to gain by taking over Merrill?

Ms. MORGENSON: Well, Merrill, of course, as we said at the onset, is an iconic name in the brokerage industry. It's, you know, in spite of this, it's still got, I think, a good reputation for serving the individual investor. So Bank of America gets a very well-known fleet of brokerage firm assets, a huge army of brokers that have established relationships with their clients, and, you know, it gets an investment bank so that when the mergers and acquisitions world starts moving again, they will be positioned to participate there.

GROSS: So Merrill Lynch is now part of Bank of America, and it no longer has any of these toxic assets on its books?

Ms. MORGENSON: Well, it's still selling them. It's still trying to get rid of all of these losses. I mean, there are some that remain because, you know, you can't - there are not many buyers for these things, right? So, you know, they're having difficulty with that, but you know, they've already written down substantial numbers of them. But yeah, they are definitely trying to jettison them.

GROSS: Gretchen Morgenson is a financial reporter and columnist for the New York Times. Her article on the fall of Merrill Lynch was published last Sunday. She'll be back in the second half of the show. I'm Terry Gross, and this is Fresh Air.

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GROSS: This is Fresh Air. I'm Terry Gross back with Gretchen Morgenson, a Pulitzer Prize-winning financial reporter and columnist for the New York Times. We've been talking about her article published last Sunday on the fall of Merrill Lynch. Merrill made stunning profits packaging and selling mortgage-related derivatives until the mortgage crisis turned these derivatives into toxic assets. Merrill was taken over by Bank of America last September after their stock plummeted.

Gretchen Morgenson, your article on the fall of Merrill Lynch was a really interesting case study in the mortgage crisis and the financial crisis. You learned more about how the mortgage crisis was created by talking to a former senior mortgage underwriter who used to work at Washington Mutual and is now one of 89 former employees whose stories are included in a complaint filed against Washington Mutual by the Ontario Teachers' Pension Plan Board, which is a big shareholder, and lost a whole lot of money.

So what are some of the things she told you about how underwriters, mortgage underwriters, were pressured to approve dubious loans?

Ms. MORGENSON: It was an amazing interview that I had with this woman. She worked out of Chicago, and she was a mortgage underwriter, which is the person who's supposed to vet or, you know, look over the loan documents to make sure that they are in order, to make sure that they make sense, to make sure that the borrower has the necessary assets, financial standing, and to make sure that everything is in order.

And what she found was that, particularly in 2007, as I think that lenders began to realize that the window was shutting on this, you know, sort of machine, this money-making machine called mortgage lending, the pressure really became intense at Washington Mutual to approve any kind of a loan. And, you know, she found it difficult. She found herself to be almost in a vice because she was urged to approve loans, and yet, really, her job was to make sure that the loans were not risky, not fraudulent.

And so she was in a bind because everybody wanted the loans to be approved. And yet, there were times when she found things that were absolutely staring out at her as potential fraud, and she would raise the red flag only to sort of be slapped down and, you know, warned and written up. There would be letters written into her employee file, her personnel file when she would venture forth with an objection to a loan that looked to her like it could involve fraud.

And so, you see, it was sort of almost like a boiler room operation where the people who were charged with, you know, sort of policing the lending operation were absolutely forced into approving everything.

GROSS: And you said that brokers sometimes tried to bribe her.

Ms. MORGENSON: Yes, there was a situation she told me about where a broker offered to pay for her son's summer football boot camp, which was $900. And it was funny because she said to me, I just was so hurt by it because what did he think? I was for sale for $900? But, you know, it was a loan that apparently had been turned down by many other lenders. And the broker really wanted the commission, and so he was willing to pay $900 to the underwriter to make sure it got done.

GROSS: So Washington Mutual was seized by federal regulators in late September, the biggest bank failure in U.S. history. How much of that was because of this kind of involvement in risky mortgages?

Ms. MORGENSON: Well, this person was just one person. I spoke with her at length, but I think that we can assume that she was not an aberration. As you mentioned, the complaint that was filed against WaMu by the investor group found almost 90 people who were willing to, you know, discuss their experiences as employees of WaMu, you know, over a period of time. And they are all very similar stories. So, you know, 90 people - that's a good amount, and it certainly makes you feel that they're not anomalies.

GROSS: Well, here's one of the many things that leaves me so confused. There are several initiatives underway and probably more to come to help homeowners who can't pay their mortgage and to re-negotiate the terms of the mortgage so that they won't lose their homes and also for the larger sake of the economy because the more mortgages that aren't paid, the larger the repercussions.

So how do you renegotiate your mortgage if your mortgage has been diced and sliced into all of these new investment vehicles? I mean, who holds your mortgage? How do we even know who holds your mortgage? And how do they find that within this security that it's a teeny part of?

Ms. MORGENSON: All are very good questions, Terry. I mean, that is the crux of the matter. The only loan workout problems that you hear about, whether it's JP Morgan's, Bank of America's, Fannie's and Freddie's, they are only talking about the loans that they own. So they are not talking about securitization pools.

They're not talking about the loans that are in those pools that have been sliced and diced. And they are not talking about those because they cannot get at them because it is too complicated because the investor who owns the note, who owns the tranche, that owns the note, that is the only person that can say yes or no to a loan modification.

So you do, as a borrower, have to find out who owns your particular note, and then you have to try to contact them, and then you have to try to get a workout. It is impossible. So the only loan workout programs that you hear about are those that are really more easily approached and attacked because they are actually the loans that are held on the books of these banks. It is a mess when you get into the securitization trusts.

GROSS: How do you even know if your loan has been packaged into a security or if your loan is just outright owned by a bank?

Ms. MORGENSON: Well, you can often tell, you know, the entity that you pay your monthly mortgage bill to is known as the servicer, the loan servicer. Now, many banks have loan servicing operations, so it's hard to tell if the loan servicer is the same as the bank that made the loan. Many times, a bank that made the loan then sells the loan to a loan servicer or to another company.

What you would have to do to find out if you are a part of a securitization trust is go to your loans servicer and ask who owns the note. Now, there have been lawyers who have spent, you know, months trying to get answers out of these people. They're not really in the business of helping people, you know, answer such questions because there are just many, many, many more problem loans than they have the manpower to tackle, these servicing companies. So that's the, you know, one way to find out.

GROSS: If you're just joining us, my guest is Gretchen Morgenson. She's a financial reporter and columnist for the New York Times. We're going to talk about some of the latest developments in the economic crisis and the bailout plan after we take a break. This is Fresh Air.

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GROSS: If you're just joining us, my guest is Gretchen Morgenson. She's a financial reporter and columnist for the New York Times.

Well, let's talk about the latest developments in the bailout plan. On Wednesday of this week, Henry Paulson announced that the Treasury Department decided not to use any of the $700 billion to buy the toxic assets. Now initially, his plan was to use all of that money to buy the toxic assets. So what do you think the change in thinking reflects?

Ms. MORGENSON: Well, I'm not sure. I mean, it really was a sort of a dumb idea at the outset, honestly, because it was an idea that was fraught with peril anyway. When he announced that this was going to be used to buy up these troubled assets that are really weighing down the major banks' balance sheets, there was no discussion of how the value was going to be placed on these securities.

Was the taxpayer going to end up paying too much for these securities? Who was going to be in there auctioning them off or selling them? Was that going to be an entity that was going to benefit somehow from that position because they may have a stake in these same kinds of mortgage securities, and they could jettison their money-losing stuff? It was fraught with conflicts, and these were never really addressed and never really detailed and described. And so, you know, from the outset, it was problematic.

Then it became clear that a more direct way to enable the banks to get on sounder footing was to just give them capital, to just sort of transfer the taxpayer dollars to them directly rather than, you know, using it as an exchange for these assets that were weighing down their books. And that's what ended up. It morphed into a recapitalization program, essentially, for the banks.

GROSS: So what happens to the toxic assets now?

Ms. MORGENSON: Well, they continue to sit on these balance sheets. They continue to be written down. The value of them continues to be written down. I think that we have to let the private sector come in, step in and buy these assets. I mean, these assets have a value. It's not that they don't. It's not that they are worth zero. But somebody who is an interested party, who has capital to invest, who is looking for an investment gain does have a, you know, an incentive to come in, examine the assets, examine each loan, try to pick and choose which ones sound like or look like they're going to perform, and buy those.

And so there is a market clearing mechanism. It's called investment. And so you need to have investors going in there, picking through the rubble, looking over the books, looking over each loan and saying, look, I'll bid this. I'll bid that. I'll make this bid. I'll make that offer. And then you'll find a value. You'll find a level of what these things are worth. But, you know, just having the taxpayer throw money at it, that was a recipe for disaster.

GROSS: So what do you think it would take to enable investors to do the kind of buying you're describing?

Ms. MORGENSON: There are investors doing it as we speak. More and more are coming into the market, feeling that maybe the worst has passed, that some of these mortgaged assets have been kind of - the selling has been overdone. There are people who are examining these CDOs and buying pieces of them. So it is happening. It's very slow - it's a very slow process.

I spoke to one of the few companies that act as sort of an intermediary in these kinds of purchases in these kinds of auctions. And they tell me that they've done about $40 billion worth of CDOs. They've liquidated them. And they have another $80 billion that they're working on. But, you know, there were just so many. I think there's $400 billion or something out there. So it's a slow process. It takes time. But it can be done.

GROSS: Henry Paulson said, we are looking at ways to possibly use the program to encourage private investors to come back to the troubled market by providing them with access to federal financing while protecting the taxpayer's investment. I don't understand what that means. So do you think you can explain that?

Mr. MORGENSON: Well, it sounds - what it could mean is that, you know, these private investors that I was talking about a little bit ago who are picking through the wreckage of, you know, the CDO market looking for loans that they think will perform well, perhaps, he means helping those kinds of institutions to capitalize themselves so that they can buy more of these mortgages than they otherwise would be able to. But, you know, it's all very vague, and the description is not too illuminating.

GROSS: You said before that you'd like to see more transparency in this bailout plan. What are some examples of the kind of transparency you'd like to see?

Mr. MORGENSON: Well, you know, when you have large regulators making decisions about which company lives and which company dies, like, for instance, Bear Stearns. Bear Stearns was allowed to live. It was forced into the arms of JP Morgan. Stockholders got very little appetence - $10 a share. But, you know, the bondholders were made good, and the company was sold.

Then we had Lehman Brothers, which was forced into bankruptcy. So you had two very different reactions, two very different decisions made by the regulators, and we don't know why. We don't know why Bear Stearns was saved and Lehman Brothers was not.

And it only sort of adds to the suspicion that there's more to the story than we know, there's more than we understand. Are there people who stood to benefit who are involved in the decisions? You know, it's just shrouded in secrecy. And these decisions are so monumental and involve the taxpayer's money. It's just a shame that the taxpayers are sort of kept in the dark.

GROSS: How do we, as taxpayers, know if we're getting our money's worth from the bailout package, if it's being effective?

Mr. MORGENSON: That's an excellent question, Terry. And again, it goes to this whole point of transparency and lack of details. There really are no sort of exit strategies, if you notice, in any of these deals. I mean, they're all so terribly open-ended. We don't know, is there a moment in time when we're supposed to get paid back, and what's the interest rate? And the sort of open-ended nature of much of these bailouts is very difficult, very problematic from that standpoint.

You know, I just don't think that we have any clue that we are going to be operating from a position of strength. I think it's all just take, take, take. And then some other time later on, people are going to come back to us and say, well, here's what we owe you or here's what we think we can pay you, and, you know, then there will be a final reckoning. But at the moment, there's just very little in the way of details about when these loans will be repaid, under what terms. You know, it's very disturbing.

GROSS: The financial crisis will be inherited by Barack Obama very soon. What do you think are some of the biggest decisions he will have to make right away about the economy?

Mr. MORGENSON: Well, you know, obviously, his choice of a Treasury secretary will be very important because that will send a signal to the world of, you know, sort of what his concerns are. And I think being communicative with people about what his plan is and his goals and how he intends to reach them will be a huge breath of fresh air. So I think, if he can come forward with an articulate plan and something that, you know, has some real details and aspects to it, boy, that'll be a huge leg up on what we've - what we've been getting.

But as far as I'm sure what he would say is that it would be about jobs, which is super important. We have, you know, an unemployment rate that's 6.5 percent, and that he has to find a way to get the consumer out of debt and back into a position where they can actually spend because the consumer, as you know, contributes to 70 percent of gross domestic product in the United States.

GROSS: There's a big economic summit in Washington this weekend, a meeting of the G20, the heads of state of 20 countries that are economic leaders who will be coming together. What's your understanding of the goals of this summit?

Ms. MORGENSON: I think some of the goals are to try to align the different regulatory practices, accounting practices, to try to make them sort of the same or to try to homogenize those things so that we don't have differences, vast differences, in the way that a financial institution operates in the United States versus some other country. I think that's one of the goals.

But obviously, the more urgent goal at the moment is to make sure that financial institutions are well-capitalized and have money to lend so that the economy can get back to doing what it does and making sure that the deleveraging or the unwinding of this huge debt that has been taken on by both consumers and corporations doesn't really devastate the economies around the world.

GROSS: The first time you spoke with us on our show about the mortgage crisis was over a year ago. It was October 10th, 2007, and I think a lot of people at that time thought the worst was over? But you said, I think we are now in the eye of the storm. Some of the worst mortgage practices took place in 2006 and even in the beginning of 2007. We have not even begun to see the problems emerging from those practices of 2006 which will start to come to the fore in 2008. So it's going to be a kind of slow motion train wreck, unfortunately.

Well, those words ring true. Did you have any idea when you said that in October 2007 how bad things are really going to be?

Ms. MORGENSON: I did not. And if you had asked me or if you had made a prediction then, Terry, that Lehman Brothers would be bankrupted, Bear Stearns would be gone, Merrill Lynch would be consumed into Bank of America, I would have said you're out of your mind because that is just - so much has happened that has been just completely out of left field and unexpected and devastating to so many people. It's just been one shock after another.

GROSS: Yeah, I was wondering whether you were holding back from us, or you just didn't imagine it could get that bad.

(Soundbite of laughter)

Ms. MORGENSON: I didn't imagine it could get that bad, but I did know that it was going to be trouble. And I think that the fact that many of our leaders refused to face it until August of 2007 really put us behind the eight ball.

GROSS: Gretchen Morgenson, thanks so much for talking with us and for explaining some more what's going on for us. Thank you.

Ms. MORGENSON: You're quite welcome, Terry.

GROSS: Gretchen Morgenson is a financial reporter and columnist for the New York Times. Coming up, jazz critic Kevin Whitehead reviews a new CD by the Cuban pianist Bebo Valdes. This is Fresh Air.
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Bebo Valdes Brings Havana To Village Vanguard

TERRY GROSS, host:

Pianist Bebo Valdes was at the center of Havana's music scene until he left Cuba in 1960. He settled in Sweden and did a lot of hotel gigs until he was rediscovered a few years ago. Now, he's universally celebrated and has a shelf full of records and Grammys. In 2005, he played a week at New York's Village Vanguard. That music is now out, and jazz critic Kevin Whitehead has a review.

(Soundbite of piano music)

KEVIN WHITEHEAD: Bebo Valdes left Havana 50 years ago, but at the piano, he's still there. Back then, he was a modernist up on the latest American and Cuban trends, but he still loves the tunes he played when he was coming up, 1930s oldies like "Siboney," "Green Eyes," "The Peanut Vendor," and Gershwin. The old ways haunt his fingertips and piano hammers. He's not reviving anything. He just kept on doing it the old way long after music in Cuba had moved on.

(Soundbite of piano music)

WHITEHEAD: Bebo Valdes makes the piano sing. He has the grandeur of those old keyboard showmen who had the touch and timing and confidence to pull off sweeping romantic gestures. Beyond that, he can really play.

(Soundbite of piano music)

WHITEHEAD: On the album "Live at the Village Vanguard," Valdes shares billing with a frequent duo partner, the Spanish flamenco and jazz bassist Javier Colina. The bassist gets plenty of solo space, and likes to quote old pop and folk and jazz tunes as much as Valdes does. Colina is best in the call-and-response dialogs, where bass and piano swing each other around like dance partners.

(Soundbite of piano music)

WHITEHEAD: A lot of jazz records get made at the Village Vanguard, as Bebo Valdes knows. He plays Bill Evans' "Waltz for Debby," recorded there in a classic version. But something happens on this Vanguard record I don't recall from any others. The Cuban standard "Bilongo" erupts into an impromptu sing-along, a spontaneous tribute to New York multiculturalism.

(Soundbite of piano music and audience singing along in Spanish)

WHITEHEAD: The old Cuban pianists didn't usually have an affinity for the blues, but Valdes always identified with American music, and he is a man of the world. If he makes a swinging up-tempo blues sound out of context at the Village Vanguard of all places, chalk it up to his transporting the house to another city in another time. It was as if, spending the evening in old Havana, he wanted to remind his audience he knew where he was all along.

(Soundbite of piano music)

GROSS: Kevin Whitehead is currently on leave from teaching at the University of Kansas, and he's a jazz columnist for EMusic.com. He reviewed Bebo Valdes and Javier Colina "Live at the Village Vanguard" on the Calle 54 Label. You can download podcasts of our show on our website, freshair.npr.org.
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Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.