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Buy the Book
America’s Fannie Pack
Just how guilty are Fannie and Freddie for the financial crisis? Read Reckless Endangerment and decide.
Reckless Endangerment: How Outsized Ambition, Greed, and
Corruption Led to Economic Armageddon
By
Gretchen Morgenson & Joshua Rosner
(Times
Books, 352 pages, $30)
THE “EVIL MAN” theory of the Great Recession, coined by the Atlantic’s Megan McArdle, parallels the Great Man theory of history. The idea is that all of our economic problems can be traced back, ultimately, to one mustache-twirling malefactor.
The left has plenty of favorite Evil Men, George W. Bush first among them. Alan Greenspan is not far behind. Clinton treasury secretary Larry Summers, who provided intellectual cover for deregulating investment banks, is a frequent progressive scapegoat.
With Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, Gretchen Morgenson and Joshua Rosner have provided the right with an Evil Man of their own: James Johnson, the former CEO of Fannie Mae and Mondale campaign manager. Morgenson, a New York Times financial reporter, and Rosner, a financial analyst, recount Johnson’s transformation of the government-sponsored housing enterprise (GSE), intended to stabilize the housing market for the middle class, into a government-backed profit machine.
Johnson’s evil genius was to combine the most advantageous features of government — income tax-free status in D.C., opaque accounting, and implicit taxpayer support in the case of failure — with those of the private sector — profit seeking and executive bonuses — into one entity. Johnson doled out both political and financial favors in lobbying Congress relentlessly, ensuring that there would be no obstacles to Fannie’s growth. His actions guaranteed that the company would one day implode, leaving taxpayers to foot the bill. More than anyone else, Johnson pushed the industry toward the kinds of abusive and reckless mortgage lending that led to the financial crisis.
In Morgenson and Rosner’s narrative, Johnson’s accomplices included almost every major figure of the Democratic establishment of the past 20 years. From the open-borders group La Raza to Obama budget chief Peter Orszag, they’re all involved, either buying influence or peddling it. The normally cautious Walter Russell Mead of the American Interest read Reckless Endangerment and concluded that “If the GOP can make this narrative mainstream, and put this picture into the heads of voters nationwide, the Democrats are toast.…If Morgenstern [sic] and Rosner are to be believed, the American dream didn’t die of old age; it was murdered and most of the fingerprints on the corpse come from Democratic insiders.”
START WITH THE ROLE played by the Association of Community Organizations for Reform Now. More commonly known as ACORN (a major right-wing bogeyman), the group catalyzed Fannie’s disastrous push into affordable housing by publicizing a flawed study showing racial discrimination in mortgage lending. Johnson responded by taking up the mantle of affordable housing and using it as political cover for its otherwise naked greedy ventures. After all, who could criticize a company that gave lower-class minorities the opportunity to own their own homes? Ultimately, however, Congress’s 1992 bill imposing affordable housing mandates on the GSEs, “more than any single act,” led to the home lending abuses of the 2000s, according to Morgenson and Rosner.
The mandate meant that, in 1999, 42 percent of Fannie and its counterpart Freddie Mac’s loan purchases serviced low- and moderate-income families. Bill Clinton’s director of the Department of Housing and Urban Development raised the requirement to 50 percent, funneling even more loans to people who could hardly afford them. That director was Andrew Cuomo, now the governor of New York and rising Democratic Party star. Cuomo had great visions for HUD’s housing goals, predicting that “it will strengthen our economy and create jobs.” In order to meet the goals set by Cuomo, Fannie and Freddie had to buy riskier and riskier loans, including subprime. Morgenson and Rosner report that GSE purchases of subprime began increasing sharply in 1999, and in 2008 Fannie and Freddie purchased $1.6 trillion of toxic mortgages, almost half of the entire market.
When critics challenged that Fannie and Freddie, which were technically private companies, posed financial risks to taxpayers in the case of a market downturn, the noted economists Peter Orszag and Joseph Stiglitz defended the companies in an academic paper published in a journal sponsored by Fannie Mae. Orszag, of course, would become the director of the Office of Management and Budget under Obama, while Stiglitz, a Nobel Prize winner, is a preeminent left-wing public intellectual. Today, taxpayers have already spent more than $300 billion bailing out the GSEs, and are on the hook for much more.
Similar scenarios would play out countless times before the financial crisis: an independent voice would point out the recklessness of Fannie and Freddie’s lending and the dangers they posed to the housing market and the taxpayers, and in response Fannie and Freddie would mobilize bought-and-paid-for elected officials, administrators, academics, and businessmen to their defense.
In this respect, the ultimate Johnson henchman was Massachusetts representative Barney Frank. Frank established a rewarding relationship with the GSEs early on (his boyfriend landed a job at Fannie in 1991, among other things), and he steadfastly defended the GSEs until after they were bailed out. He overruled objections to affordable hosing mandates in 1991, complaining about an undue “focus on safety and soundness.” When regulators looked into Fannie’s rigged executive compensation scheme in 2004, he brushed them off by claiming that “it serves us badly to raise safety and soundness as a kind of general shibboleth, when it does not seem to be the issue.” Even in 2010, after the financial regulation bill co-sponsored by him totally left the GSEs alone, Frank stated that “blaming Fannie and Freddie as a primary cause of the crisis is a mistake.”
As Peter Wallison has demonstrated in The American Spectator, by 2008 half of all mortgages in the U.S. would have traditionally been considered low-quality loans. Slightly fewer than half of those were on the books of the GSEs. The affordable housing mandates and relentless quest for profits ushered in by Johnson, aided by Frank, are largely to blame.
Why did Johnson do all this? For personal gain. Morgenson and Rosner claim that a study found that for many years, you could predict Fannie’s year-end earnings per share almost to the penny, based on what the earnings-per-share bonus payout target was. Over the course of his tenure, Johnson banked $100 million.
ASSIGNING BLAME for the financial crisis is tricky, because there are levels of causality. As with a murder, what’s of interest is not the proximate cause (the banks collapsing), but the ultimate cause, which could be any one of a thousand possibilities. If the economy is a victim, what we want to know is who fired the gun, not what wounds exactly caused it to die.
Some, like Mead, have suggested that Reckless Endangerment proves, once and for all, that government policy, through Fannie and Freddie, was squarely behind the trigger. That proof—definitive proof—would reinforce, and reward, the political right’s prejudices.
About the Author
Joseph Lawler, former managing editor of The American Spectator, is editor of Real Clear Policy. Follow him on twitter: @josephlawler.
Letter to the Editor View all comments (31) | Leave a comment
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JP| 9.2.11 @ 7:50AM
I read Reckless Endangerment last summer. And while it was eye opening, there was plenty of blame to go around (Kit Bond, and Bush43 to name a few in the GOP). The biggest thing to take away from this book is how utterly depraved the idea of Public-Private partnerships actually is. In theory it sounds great; in reality it is a policy disaster. Fannie and Freddie, if anything, are poster-boys of what happens when private greed gets extended in the public domain (ie taxpayers).
What also should be remembered is how gulliable many GOP economists were during the last market boom (2002-2007). Larry Kudlow is a great guy; but as part of the investor class he was a cheerleader of the overheated securities bubble.
Reckless Endangerment should be forced fed to every American. It's an indictment not only on Progressives, but American culture in general.
Have you considered| 9.2.11 @ 10:53AM
JP, great points, and thank you for pointing out the complicity of the GOP. This fact often gets overlooked.
Remember back when McCain argued for reining in the GSEs?
Did he stand upon principle and fight? No he did not.
He let others bark him down, and he rolled over like a good boy, didn't he?
JJC| 9.2.11 @ 10:13PM
McCain is a republican? Are you sure of this?
Mike| 9.4.11 @ 1:39AM
McCain is not a Republican. McCain is a McCainist, that is he is only out for the aggrandizment of John McCain.
For proof look back at the Savings and Loan scandel and look who was a member of the Keating Five who were complicit in that criminal enterprise. McCain was up to his immobile armpits.
Reining in the GSEs was right up McCain's back alley as was McCain-Feingold an attempt to silence political speech for those McCain disliked.
I voted for him last time, but it took two clothes pins to stand the stench.
Jay Dee| 9.4.11 @ 6:19PM
He rolled over, as you say, because Congress was Democratic and they wouldn't look into the allegations.
Alan Brooks| 9.2.11 @ 1:37PM
Fannie and Freddie prove America is more socialist than Europe, so our going even mentioning Euro-socialism is the pot calling the kettle black.
Alan Brooks| 9.2.11 @ 1:38PM
America has been more socialist than Europe since the Great Society era: 45 years!
axbucxdu| 9.6.11 @ 7:56PM
The USA: The only country where marxist socialism
has yet to fail.
Trebuchet| 9.2.11 @ 8:36AM
The book does a very good job of telling how and who set up the whole house of cards; however, like the other books I've read it stops short of naming who kicked that house over; George Soros, John Paulson and Goldman Sachs.
Alan Brooks| 9.2.11 @ 1:39PM
that is conspiracy theorizing, you wingnut.
Trebuchet| 9.3.11 @ 8:36AM
1991 Penny Pritzker, a Lib Dem, of Superior Bank comes up with the Mortgage Backed Security to sell portfolio's of Sub Prime loans from her Bank.
1995 JP Morgan comes up with the Credit Default Swap as a Hedge against any loss they may incur from the purchase of the Sub Prime tier of CDO's.
2000, ACORN goes after Ameriquest and Ameriquest makes a big Donation and teams with ACORN to sell their 100% no Down no Doc loans. Paul Sarbanes tells the then CEO of Ameriquest Kirk Lang in front of the Senate Banking Committee "you guys do it right".
2003, Roland Arnall of Ameriquest, after years as a liberal Democrat, changes parties and backs Arnold S. for Gov. over Gray Dufuss and becomes a supporter of President Bush. Arnall becomes a Neo-Con and finances a private intelligence gathering community headed up by Michael Ledeen. The Left headed by George Soro’s unsheathes the long knives.
2005, Eliot Spitzer a Democratic Presidential hopeful goes after Ameriquest.
2005, John Paulson the head of Paulson & Co. Hedge Fund has a lunch meeting with Soros and they begin buying CDS's against Ameriquest CDO's and shorting the ABX. George Soros nephew is the largest investor in Paulson’s fund. Paulson and Goldman Sachs set up the Abacus Fund loaded with companies that are buyers of Ameriquest CDO’s. As an aside, Soros warns his close associates Herb and Marion Sandler, the owners of World Savings the originators of the Adjustable Rate Mortgage, to sell out which they did just before the crash making a cool 21 Billion dollars.
As more CDS's are bought, automatic triggers for drops in ratings from Moody’s, Fitch, MBIC etc are triggered.
2006, Ameriquest can't sell CDO's because the ratings are dropping. The Hedge Fund Sharks smell blood and circle, buying every CDS they can get and begin buying them against the other Sub Prime CDO's from other Investment Banks and Lenders and anyone who bought Sub Prime CDO's.
2007 New Century and Ameriquest are bled to death (Citigroup led by a Lib Dem, Robert Rubin, picked up the pieces of both) and fold. Paulson makes 14 Billion, Soros makes 13 Billion. The Hedge Fund Managers go into full feeding frenzy and buy CDS against anything that lends money and then begin using Naked Shorts to make sure the ratings drop on the Investment Banks making their CDS explode in value. Also, the companies issuing the Mortgage Bonds can’t find enough crappy loans to issue bonds on to create the other side of the CDS trade so the start writing phony Bonds backed by nothing.
Soros has purposefully crashed the Mortgage Market, the Housing Market and the US Economy with two outcomes in mind. 1) Cut off funding for the Conservatives (Real Estate, Home Builders and Mortgage Industries are big contributors to Republicans) and 2) Crash the Economy and insure his candidate Barrack Obama is elected President.
In other words the Democrats stole the equity in the Boomers homes and now they are stealing their retirement funds. And Mr. Brooks you are a ruptured nut.
Alan Brooks| 9.4.11 @ 10:00PM
Democrats??
isn't it the New World Order Globalist NeoCon Quasi-Marxist Bilderberger Eurosocialist Gay-Agenda Vegetarian Pinko Longhairs?
But now we know; it isn't the fluoridation of our precious bodily fluids which began in 1946;
it's the Democrats. You shouldn't have told me, you should have kept it a secret, Trecuchet. You know too much, THEY might take you away in the middle of the night to surgically implant a chip in your brain,
serial #666...
Trebuchet| 9.5.11 @ 9:19AM
So how does quoting General Ripper from Dr. Strangelove refute anything I've said? It doesn't and you can't.
axbucxdu| 9.6.11 @ 8:06PM
Touche, Trebuchet. These 19th century scourges the vampire squid (GS) and its just as evil twin, the smartest guys in the room (JPM), need to be liquidated.
The proximity these two criminal organizations have to the U.S. government and the Fed has caused more financial havoc than the GSEs.
Darrell Judd| 9.2.11 @ 8:48AM
Everyone on each side of this issue likes to fall into the plush armchair of their own cliches, but, really. No one takes the Peter Wallison argument seriously. He has been fisked many times, including by Simon Johnson. And the word in the book title above that makes it false based on simple verifiable facts is "Led". All Fannie and Freddie did, including its grossly greedy and corrupt leadership, was imitate what was going on in the private sector for about 3 or 4 years. They got in the game late.
It was unregulated derivatives and credit default swaps that destroyed the investments of a good many Americans. Or as David Einhorn concluded in his book a culture of lawlessness on Wall Street.
ericcs| 9.3.11 @ 9:01PM
It's always a wonder to me whenever leftists or their useful idiots start prattling on about “greed”. In fact it is a monumental joke, with more of the relentless semantic games and lies deliberately used to obfuscate the leftist agenda. None of this economic disaster would have been remotely possible without the financial backstops set up by the government.
In the case of both the mortgage meltdown and the subsequent attempts such as TARP (proposed by the progressive Republican Bush) to “fix” it, the left wants the economic mistakes of banksters to be redistributed across the masses of people, both those now alive and future generations. The many are forced to underwrite the failure of the few. That's pure unadulterated socialism. If some financiers get their usual cut along the way, it doesn't prove otherwise. As always, it's rationalized with leftist hysteria, fearmongering, and sanctimonious moral preenings that then become the agitprop spewed out by the progressive lapdog media.
The big picture is plain for all who live in reality to see: the leftist oligarchy has made deals with the jerkoffs of high-finance, such that the left is allowed tyranny over the little people while the banksters finance it. The result is an unholy mix of statism/corporatism/leftism. Technically it might not be communism or fascism, but it is most certainly predicated on socialism. Of course it still allows the leftists at the top to live like arrogant royalty, including vacations in Spain and Martha's Vineyard, and numerous trips to the golf course.
The only greed here is for more power and lavish perquisites by leftists, aided and abetted by their bankster bedmates. Both of them dangle visions of world government in front of each other, expecting the other to be the chump when they secretly plan to wrest total control at some final outcome. All of them deserve a special place in hell.
axbucxdu| 9.6.11 @ 8:12PM
These dupes should be forced to run a business to experience firsthand the consequences of their stupidity. Hell, the income statement these days reads like a chapter from the Communist Manifesto.
Petronius| 9.2.11 @ 9:04AM
Whoa. Rewrite the first chapter. These "companies" were founded to cushion the banks who were forced to lend money to unqualified underclass borrowers and be the "flipees" receiving all this bad paper first authored by...(drum roll)...
Soloman Brothers gang back in 1978. They started securitizing mortgages and selling these bonds at a discount, assuming that property values would rise on the if come. Read the first book; Liars Poker, by Michael Lewis. After changing hands 3 or 4 times there were no more buyers for this funny paper. Enter Fannie and Freddie playing the role of "investor". Then when the house of cards collapsed, the beltway Liberals got what they have wanted for ages. Real estate values have been destroyed for a majority of middle class home owners over night. Equity in older homes like mine has been cut in half. Damn the U.S. Government for doing this to us. President Reagan was right. When the government shows up and says, "we're here to help", look out.
axbucxdu| 9.6.11 @ 8:52PM
I recently performed an ROI analysis on a mortgage I'm taking and the constant dollar return to the bank (and by extension the "secondary" investor, i.e., a GSE) in 2011 dollars came to less than 1% over 30 years when fully amortized. The pitiful real return got me thinking about the entities that would find this acceptable.
It seems the paper that GSEs bundle up is only intended to preserve capital, but they can also consolidate these notes on a macroeconomic scale.
The GSE conduit is the only way that lenders to the USG can be persuaded to accept our constantly deteriorating currency. These companies exist because the government needs them to help finance its largess. People don't realize that when they're paying their mortgage, they're also paying their taxes.
The Bishop| 9.2.11 @ 9:22AM
I've also read this book this past summer and I agree that there's lots of complicity from both sides of the political aisle. More than anything else, this book underscored that catastrophic fallacy of socializing risk. The idiotic policies that seemed to compound through various administrations (and are still active) have wiped out untold amounts of equity from ordinary folks who were pursuing the American dream according to time-established principles. And now, this Administration is toying with the taxpayer subsidizing distressed mortgages to forestall foreclosure. The idiocy continues.
Pat Korten| 9.2.11 @ 12:26PM
I read the book a couple of weeks ago and highly recommend it. To get a really full picture of how the whole mess developed, it's a good idea to read both Reckless Endangerment and The Big Short by Michael Lewis. The big shortcoming (pun intended) of Lewis' book is the absence of any reference to Jim Johnson and Fannie Mae. It's an inside-Wall Street book, and it does that well, but the Morgenson/Rosner book provides crucial context without which a complete understanding of the crisis is impossible.
JACK| 9.2.11 @ 1:42PM
This is old news. I watched in disgust as Frank, Dodd, Waters, and others questioned those that had concerns, scolding them for not wanting the poor to have a home while the system collapsed. People that elect them as representative should be ashamed of them for destroying the values of peoples homes. Sadly, these destroyers of wealthy are either blind or ignorant or both will probably be reelected by their constituents and the country will continue to suffer with such inept leaders.
proreason| 9.3.11 @ 6:40PM
Johnson is certainly a criminal of the highest order, but there are always plenty of them laying about in leftist swamps, and other swamps for that matter. He might be the trigger man, but certainly isn't the don.
The scheme is the collective brainfart of the extreme fringe of the far-Left, Franks, Soros, Obama, Acorn. They got what they wanted. We're living the result right now.
They will gladly do more to win Obama another term. The worldwide depression of the last 3 years, hidden from view by the printing presses and massive borrowing of the US government, hasn't tipped the world into total anarchy yet. One more term by the Front Man will do it.
They will do anything to make it happen. The Depression is a drop in the bucket.
brooksanne| 9.3.11 @ 8:13PM
Darrell Judd-- if the culture of lawlessness on Wall Street is to blame, why didn't this happen before?
I mean that as a real question. If greed is behind the disaster, why weren't disasters like this always happening?
It seems to me that there had to be a change in the basic game -- a suppression of market forces -- to make this particular disaster occur. Incentives to go against good business practices don't come from greed but from gov't guarantees, right?
David Shoup| 9.3.11 @ 8:38PM
The issue is not whether Fannie Mae and Freddie Mac and their camp followers are culpable. I knew they were from the get-go. The issue is if anyone in Congress will hold the feet of these MoFos to the fire. I doubt if one Congressman in two can understand Lawler's article, much less Morgenson and Rosner's book. I have listened to Congressmen and Senators speak. Some of them are as dumb as a bag of hammers.
Chuck| 9.4.11 @ 8:42AM
Chuck chuckles at the notion Fannie & Freddie "private" institutions set up by the federal government to steal taxpayer’s money. But nothing compares to the Central Bank another "private" institution setup by the federal government which has destroyed the currency and the wealth of the nation. Barney "Ocean Spray" Frank is hilarious. Do you know the gay cranberry is gearing up for another round of F & F machinations and manipulations with his boyfriends?
David Shoup| 9.4.11 @ 6:58PM
Yes, here is true malfeasance and criminality that threatens the fiscal solvency of the entire country, and who does Eric Holder's Justice Department go after? Gibson's Guitars for using a few pieces of"rare" wood (I thought wood was a green, renewable resource? Obama should be happy.) and Rick Reese's gun shop in Las Cruces, NM, over a half dozen guns, when the Bureau of Alcohol, Tobacco, and Firearms engaged in wholesale illegal weapons sales to Mexican drug cartels.
POST American| 9.4.11 @ 11:19PM
----------------------FINAL WORD----------------------
USURY, to say nothing of
psychopathic, unaccountable,
ungrounded USURY, remains
what God Almighty himself deemed it
---'something out of nothing'
----creation mocking --------ABOMINATION.
Dan Mathewson| 9.13.11 @ 5:06PM
What, if any? If not, how much?
Oldefarte| 9.5.11 @ 4:04PM
I'm getting writer's cramps from declaring this continually, but this housing welfare began mostly with the Democrats' enactment of the CRA of 1977 and rolled economically/financially down hill through the GSE to its present stopping point of financial ruin of today. Every viable homeowner reading this can thank the Democratic Party [and possibly themselves as voters for Democrats] for the current state of the real estate market and the loss of 30-50% + in value of thie personal homes. It was/is/forever will be simply HOUSING WELFARE, since it was the government [ieDemocrats who initiated/facilitated same] deciding that anyone wishing to buy a house at whatever price, should be entitled to do so because of their constitutional ''''''RIGHTS'''''''. no matter that most of these buyers could not afford [per their anemic incomes/financial conditions/statuses] to do so. What the hay, the taxpayers will pay for those houses eventually if the inept borrows default, right? So says Democratic politicians, who naturally get the votes as thanks from all of their financially indigent constituents. Democrats are the political gifts that keep on giving, and the voters of this country are the STUPIDS that keep on elected those Democrats to elective offices. Enjoy your super-depressed home values, because it aoin't gonna get no better to hell freezes over, that's for sure!!!!!!!!!