We Were Warned
Last December I interviewed Sherron Watkins, the accountant who blew the whistle on Enron and its misdeeds. I’ve gone back through my notes because she predicted the current chaos. Below is the unedited transcript of her remarks – again, this was nine months ago:
“I’ve described 2002 as a problem in corporate
Sarbanes-Oxley Act, which was focused on corporate reform. But you had very powerful groups, the U.S. Chamber of Commerce, the Business Roundtable, that really tried to take the teeth out of the act. People who had banked Ernon, or Enron executives, they’re back out in the community. We didn’t kill the Ebola virus with the Sarbanes-Oxly Act, we spread it. I think this sub-prime mortgage crisis, it’s going to be the Ebola virus that got out.
People are selling product to people who had no business getting those products. We’ll have a liquidity crunch, and a recession or worse is coming. What you have is the perfect storm in the sense that banks have junk they can’t get rid of. Henry Paulson is trying to get it into a super fund and sell it to mom and pop investors through insurance. They also sold a lot of colateralized mortgage obligations that credit rating agencies said were AAA that are not AAA risk. Who bought those – insurance companies and insitutation investors that have cash to invest. They’re going to lose money. And secondly, what happens when you’re talking about homes is a few people who shouldn’t have borrowed but borrowed are going to have to forclose, they will have to walk away and let the bank have their house because they can’t do anything with their house. The banks don’t know what to do with that inventory, they will have to start dumping. There aren’t any buyers because there aren’t any lenders, and the price will drop further. So prices start to decline.
Now what happens is people’s mortgages are worth more than home values, because home values are going down. You end up having more and more people walking away, because they owe $50,000 more than it’s worth. And it gets worse and worse.”
- Steve Lackmeyer, Business Writer
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