Frank Stein's Reviews > Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Reckless Endangerment by Gretchen Morgenson
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Jun 15, 2011

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From the rather non-specific title to the cover art featuring generic shadowy businessmen figures, one might assume this was just another general screed about the Wall Street mistakes that led to the financial meltdown. Yet I assume the title actually reflects the publisher's understanding that its real subject would not garner a popular audience. Though it does contain plenty of expected, and oft-repeated, facts about poor regulation and short-sighted banking profits, this book is really about one company, Fannie Mae, the quasi-governmental Federal National Mortgage Association (FNMA) that, with its sister company Freddie Mac, ended up costing the government more than every other bank bailout combined.

Far more. While the TARP banks should end up paying back almost all of their bailout loans, these two "Government Sponsored Enterprises" (GSEs) have already cost the taxpayers about $150 billion dollars, and the price is only set to go higher. These figures make the typical focus on companies like Lehman Brothers and Bear Stearns somewhat hard to understand. The farther we get from the financial crisis, the more important Fannie Mae looks.

In this book New York Times economics reporter Gretchen Morgenson surveys the long history of Fannie Mae's collapse, going way back to James A. Johnson's time as CEO, from 1991-1998. Morgenson shows how Johnson cultivated important Congressmen like Barney Frank (hiring his boyfriend back in 1991, for instance, one of many examples of the company hiring friends and family of congresspeople for safe, cushy jobs). Johnson also opened "Partnership Offices" in important congressional districts that later investigations showed to be nothing but patronage pits that dispensed funds and jobs to favored institutions. In a similar vein Johnson created the Fannie Mae Foundation, whose "charity" consisted of donating to such groups as the Congressional Hispanic Caucus. In the end, the list of important political figures that were tied to Fannie through board positions on the company or through its charity or through other companies with Johnson and other Fannie Mae execs on their board is truly bewildering. Fannie had its claws into every part of the government and society.

Even while he was cultivating government support, though, Johnson was pushing to make special deals with subprime mortgage companies, like Countrywide Financial, that loaned largely to poor mortgagors. This both created more profits on higher interest rate loans for the company and gave the appearance of "assisting" needy borrowers, which, in turn, justified the company's "special relationship" with the government.

Despite all the money and million dollar payouts involved here, the most disturbing part of this book is how a single company was so able to corrupt the levers of democracy. When there was an attempt to regulate the company in a 1992, Fannie got Henry Gonzalez, Housing Banking Commitee chair and later recipient of the Fannie Mae "Housing Hero" award, to withdraw the bill, in his words "to allow more time for Fannie Mae to pursue changes." When the Treasury Department was going to issue a report to recommend privatization in 1996, Larry Summers and others with connection to the company "bullied" staffers, as they later claimed, until it was withdrawn. Fannie in 2003 even hired groups like ACORN, which was on Fannie's "Housing Impact Advisory Council," and received grants through its "Open Doors to Affordable Housing" program, to protest "predatory lenders" like Wells Fargo which competed with the company, while such groups were paid off to ignore Fannie's own predatory loans.

So there's lots to think over here, but the writing is often terrible, and some simple factual errors are glaring for an economics reporter (Peter Orszag was not be "Obama's Congressional Budget Office Chief," he would be head of OMB). The incredible story though makes it worth the effort.


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