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.
Yet the book doesn’t quite
do that. It provides plenty of circumstantial evidence: Fannie and
Freddie owned the same model of gun that was used in the crime,
they associated with known murderers, their recent behavior was
alarming, and investigators found unexplained deposits in their
bank accounts. And Morgenson and Rosner establish that, without a
doubt, the crisis would have been less severe without Fannie and
Freddie’s influence.
The difficulty is proving a negative: incomprehensible assets
backed by toxic mortgages would not have brought Wall Street down
without Fannie and Freddie’s influence. It’s possible, even likely,
but extremely hard to prove beyond a reasonable doubt.
Of course, Reckless
Endangerment makes it seem likely that the large market
for subprime loans wouldn’t have existed without the GSEs.
Morgenson and Rosner demonstrate that, for instance, Countrywide
Financial—one of the most abusive lenders—was “at heart a Fannie
Mae clone,” with its CEO, Angelo Mozilo, enjoying an extremely
close relationship with James Johnson.
Yet regardless of who is to blame for the crisis of 2008,
Reckless Endangerment
powerfully undercuts the progressive narratives about economic
growth and social advancement, as well as explanations for the
financial crisis. The idea that concentrated government can be
directed toward specific societal goals has been irrevocably
shaken. There is no denying that, in one decade, progressivism’s
brightest lights decided to increase homeownership using the tools
of power, and then, in the next decade, they were co-opted by
rent-seekers and the housing market was utterly destroyed. In the
end, regardless of who pulled the trigger of the gun, it was
progressives who ordered the hit.
