Five women of the financial crisis: Who they are and why they mattered

September 17, 2013

 

The 778 fall in the DJIA on September 29, 2008, was the largest single-point drop in history (Washington Post)
The 778 point fall in the DJIA on September 29, 2008, was the largest single-point drop in history (Washington Post)

Just after midnight on September 15, 2008, the investment bank Lehman Brothers filed for bankruptcy protection and triggered the global financial crisis. Thanks to a $700 billion rescue package from Congress and additional billions of funding from the Federal Reserve, the United States merely fell into a Great Recession rather than a second Great Depression.

While the names most people might associate with the crisis are male — Dick Fuld, the head of Lehman Brothers; Ben Bernanke, the chairman of the Fed; Hank Paulson, the Secretary of the Treasury; Lloyd Blankfein, the head of Goldman Sachs; Jamie Dimon, head of J.P.Morgan Chase; and Joseph Cassano of AIG — a few women played prominent roles in the financial crisis. Here are five women who played such roles in the financial crisis and why they mattered.

Blythe Masters, JPMorgan Chase. Masters is the JPMorgan Chase banker who has been vilified as the creator of what Warren Buffett has called the “financial weapons of mass destruction” that were at the heart of the financial crisis. As Gillian Tett recounts in “Fool’s Gold,” back in 1994, J.P. Morgan put together a financial deal involving Exxon Mobil and the European Bank for Reconstruction and Development that would essentially “insure” J.P. Morgan against a potential default on the Exxon loans. This type of deal became known as a credit default swap, or CDS. The market for credit default swaps grew to more than $62 trillion by 2008. That market had fallen to $25 trillion at the end of 2012, according to the Bureau of International Settlements.

One part of that market encompassed the safest part of the CDS, or the “super senior” debt that was marketed as being even safer than Triple-A rated debt. Masters convinced one of J.P. Morgan’s long-standing clients, the American International Group, to insure this portion of the debt in exchange for a fee from J.P. Morgan. As Tett recalls, the head of the operation, Joseph Cassano, called it a “watershed event.” Only years later, according to Tett, “did it become clear that Cassano’s trade set AIG on the path to near ruin.”  (A spokesman from JPMorgan Chase, Brian Marchiony, wrote in an e-mail: “AIG approached J.P. Morgan as a professional counterparty in 1998, requesting high-grade corporate credit-default swaps. Considering Blythe has never sold or created a mortgage-backed security, nor a derivative linked to one, it’s a gross exaggeration of the facts to connect her to AIG’s subprime mortgage-backed securities investment decisions that caused its collapse a decade later.”)

By September 2008, AIG was clearly on that path to ruin when it faced billions of dollars in payments on its CDS contracts that it couldn’t meet. Viewing bankruptcy of AIG as causing irreparable damage to the economy, the Federal government rescued AIG with an $85 billion loan on September 16, 2008. The collapse of the CDS market engulfed not only AIG, but also many other financial institutions. 

Masters now leads JPMorgan Chase’s largest commodities trading operation.  

Anastasia D. Kelly, the American International Group. In 2008, Kelly was an executive vice president, general counsel and senior regulatory and compliance officer with AIG, having joined the firm as general counsel in 2006 following an accounting scandal that led to the resignation of AIG’s long-time leader, Maurice R. “Hank” Greenberg. According to Carol Loomis of Fortune magazine, Kelly was “at the epicenter of a financial cataclysm” that rocked the financial markets. 

The Congressional Oversight Panel that monitored implementation of the Emergency Economic Stabilization Act of 2008 found that AIG’s risk management and internal control systems had failed, charging that AIG’s management had overlooked the risks that AIG’s London-based Financial Product group was taking on. 

In March 2009, AIG became embroiled in controversy over plans to pay $165 million in bonuses and retention pay to its executives despite having lost $61.7 billion in the last quarter of 2008 (the largest corporate loss in history) and having received $170 billion in government support at that time. The Treasury Department said that it had no legal authority to block AIG’s payments.

Kelly later became embroiled in her own compensation controversy after the government’s special master for executive compensation, Kenneth Feinberg, announced that he was going to limit pay for the top executives at companies then receiving government assistance to $500,000. To avoid these restrictions, Kelly left AIG at the end of 2009 with a reported multi-million dollar severance package.

The U.S. government ended up making a $22.7 billion profit on its $182 billion bailout of AIG, according to a report the White House released on Monday.

Kelly joined the law firm DLA Piper in March 2010.

Erin Callan, Lehman Brothers. Callan, a Harvard graduate and former tax attorney, was the chief financial officer at Lehman Brothers from December 2007 to early June 2008.  She’s the most high-profile female banker associated with the financial crisis, even though by the time Lehman collapsed on September 15, Callan hadn’t worked for Lehman for nearly three months.

Callan’s profile rose following the collapse of Bear Stearns in March 2008 when she reassured investors that Lehman Brothers wasn’t about to collapse. The major Wall Street firms have never had a female chief executive and Callan was seen as the most powerful woman on Wall Street. That image didn’t last long.

Callan resigned as CFO of Lehman Brothers in early June 2008 “amid mounting chaos and a cloud of public humiliation only months before the company went bankrupt,” according to a March op-ed she wrote for the New York Times.In reflecting on her time on Wall Street, Callan lamented putting her career ahead of her family.

Callan is presently not working, according to The Wall Street Journal.

Sheila Bair, the Federal Deposit Insurance Corporation. Bair was appointed in 2006 as chairman of the Federal Deposit Insurance Corporation that insures bank deposits and liquidates failed banks. Bair’s role in stabilizing the banking system can’t be overstated.  As Paulson recounts in his book “On the Brink,” the whole financial system was at risk of collapse in October 2008. “Your decision will prevent a financial calamity, and Ben [Bernanke, the Fed chairman] and I will support you 100 percent,” Paulson said.

On October 13, 2008, Paulson called nine bankers to the Treasury Department and made each of them sign a pledge that in exchange for government loan guarantees, his bank would agree to borrow a pre-specified amount from the government through the Treasury’s $250 billion capital purchase program. This program, which was funded by the Troubled Asset Relief Program, was designed to stabilize the banking system by injecting capital into the banks. Bair was there to explain that the FDIC would insure the debt of bank holding companies, such as Goldman Sachs and Morgan Stanley, rather than just the debt of FDIC-insured banks, such as JPMorgan Chase, Citigroup, Bank of America and Wells Fargo.

In 2009, Bair won the John F. Kennedy Profile in Courage Award for “sounding early warnings” about the sub-prime lending crisis.         

Bair has written a book, “Bull By The Horns: Fighting To Save Main Street From Wall Street And Wall Street From Itself.”  She is now a senior advisor to the Pew Charitable Trust.

Elizabeth Warren, Harvard law professor. As a law professor and bankruptcy expert in 2008, Warren argued against a regulatory system that she said gave consumers greater protection against a faulty toaster than against a faulty banking system. As Paul Krugman wrote in 2011: “More than a decade ago, when politicians of both parties were celebrating the wonders of modern banking and widening access to consumer credit, she was already warning that high debt levels could bring widespread financial disaster in the face of an economic downturn.”

The result of Warren’s advocacy was the Consumer Financial Protection Bureau (CFPB), created in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act. Warren became special advisor to the Treasury for the CFPB.

In the early days of the financial crisis, Warren had been named chair of the Congressional Oversight Panel that monitored the $700 billion TARP fund.

Warren, a Democrat, is now the senior senator from Massachusetts and a member of the Banking Committee.

 

Joann Weiner teaches economics at George Washington University. She has written for Bloomberg, Politics Daily, and Tax Analysts and worked as an economist at the U.S. Treasury Department. Follow her on Twitter @DCEcon.
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