They should be in Sing Sing cleaning the commodes with toothbrushes

A review of Reckless Endangerment, by New York Times reporter Gretchen Morgenson and housing analyst Joshua Rosner, Times Books, New York, 2011

reckless endangermentYou have to hand it to our broken political and economic system:  It is becoming more proficient at strangling prosperity and freedom. 

The system took over 60 years to slowly strangle a consumer market in medical care/insurance with the noose of corporatism, favoritism, subsidies, socialism, and red tape.  Now the coupe de grace has been administered to the dying and dysfunctional market by the absurd legal reasoning of Justice John Roberts in his upholding of ObamaCare. 

By contrast, the system took only about 13 years to create the bubble in housing, which, when it collapsed, nearly killed the economy and left families financially devastated, right at the time they needed to save for old age and pay off government deficits.

Reckless Endangerment details how this terrible feat was accomplished and who did it. 

It was accomplished by the two political parties, government regulators, rating agencies, Wall Street, the government-sponsored mortgage enterprises of Fannie Mae and Freddie Mac, the Federal Reserve and its banking cartel, realtors, home builders, greedy and dishonest home buyers, and do-gooders such as ACORN and other community organizers and race baiters.  All of these people and organizations joined forces to strangle a free market in housing, thus causing a bubble and triggering an economic calamity that will take decades to remedy, assuming that the Republic can survive.

Of the five books that I’ve read on the housing bubble, Reckless Endangerment is the best in describing the incestuous relationships and revolving doors between all of the scoundrels in politics, regulatory agencies, and Wall Street. 

For the tremendous and long-lasting harm they did to the country, the scoundrels should be in Sing Sing cleaning the prison commodes with toothbrushes.  If you think this is over the top, you will probably change your mind after reading this synopsis of the book.  The system has become so broken and corrupt that, with few exceptions, the people who caused such tremendous economic damage are still living in their mansions, collecting their obscene pensions, and contributing to their protectors in Congress and the White House.

The sorry story of the bubble is long but worth your time.

The story begins in 1992 with Alicia Munnell, an employee of the Boston Fed, who, along with her co-authors, published a paper showing that blacks and Hispanics were far more likely than whites to be rejected for mortgage loans, for no other reason than their race.   Boston Fed President Richard F. Syron applauded the study and jumped on the discrimination bandwagon. 

Scholars would later find that the study was not valid, but in the interim it triggered an outcry from the usual suspects in the race-baiting industry, who claimed that banks were violating the spirit if not the law of the Community Reinvestment Act of 1977, which had been passed to stop the red-lining practice of banks not writing mortgages in poor neighborhoods. 

Eventually, the uproar resulted in a lowering of mortgage underwriting standards and the growth in power and profits of the government-sponsored enterprises of Fannie Mae and Freddie Mac, which had the mission of buying mortgages from banks and other mortgage originators, packaging them into mortgage-backed securities, and selling them to investors.

In order to increase the number of mortgages for minorities, down-payment requirements were lowered to five percent or less from the traditional standard of 20%, and the use of credit history as an important factor in determining credit worthiness went out the window, as did the old limit of mortgage payments not being more than 28% of a borrower’s income.  At the same time, Fannie Mae’s capital requirements were lowered to a level that was significantly below the level set for banks.  A perfect financial storm was forming. 

During this period, Fannie Mae was headed by James Johnson, who eventually would be succeeded by Franklin Raines, who would continue Johnson’s policies.  Using the fig leaf of helping minorities and the poor, Johnson turned Fannie into a powerful propaganda, patronage, and lobbying enterprise, as well as a cash machine for executives.  Johnson alone earned (stole?) over $100 million for the nine years he headed the company. 

Fannie would rely on politicians and community groups that it had bought with contributions to fend off and demonize anyone, including regulators, who dared to question its highly leveraged balance sheet, its dishonest accounting, its risky mortgage standards, and its moral hazard to taxpayers by becoming too big to fail.  Reckless Endangerment lists the major friends of Fannie, and several of them will be discussed in this review.  Of course, most of the media gave the company a pass, because, as always, they were fooled by the hyperbole about racial discrimination.

On the surface, Johnson was a paragon of “do-goodness” and a darling of the brie and pate set.  His background included running the Kennedy Center for the Performing Arts in Washington and the left-liberal Brookings Institute.  He also had been an advisor to former Vice President Walter Mondale and, 20 years later, to presidential candidate John Kerry. After Mondale was trounced in his run for the presidency, Johnson returned to the political consulting firm he had started with Richard Holbrooke, the former assistant secretary of state.  When the firm was bought by the investment bank Shearson Lehman Brothers, Johnson and Holbrooke became managing directors of the bank.

Overflowing with ambition and questionable ethics, Johnson established a thuggish, Mafia-like culture at Fannie, where enemies were destroyed and friends paid off.  Yet due to Fannie’s masterful propaganda, the company made Fortune magazine’s list of “Best Companies to Work for in America,” Working Mother’s “Best Companies” list, and the American Benefactor’s list of“America’s Most Generous Companies.”  Perhaps the most naïve of all, the business best-seller, From Good to Great, listed Fannie as one of the great companies.  (Confession:  When I was a corporate executive, a search firm courted me for a position at Fannie, but I didn’t pursue it due to sensing that something was rotten at the company.)

Johnson, who headed Fannie’s compensation committee and feathered his own nest, also headed the compensation committees of other companies where he was a board member, including Goldman Sachs, home builder KB Home, and United Healthcare.   In the last two cases, compensation approved by Johnson later had to be rescinded due to irregularities.  Worse, the chief executive of KB Home, Bruce Karatz, a friend of Johnson, was convicted of a felony for manipulating stock option grants.

Johnson’s directorships are a case study in how incestuous relationships are established between the government and banks, as well as other corporations seeking favors and privileges from government instead of competing on their own merits in a free market.  For example, Johnson became a director at Goldman about the same time that Henry M. Paulson Jr. became its chief executive.  Paulson would later become Treasury secretary and oversee the taxpayer bailout of Fannie.

Another example:  In the mid-1990s, lower-level analysts at the Treasury wrote a report recommending the privatization of Fannie (and Freddie) to eliminate the risk that the government might have to someday rescue the company.  Treasury Secretary Robert Rubin, who was a friend of Johnson, delegated the quashing of the report to his deputy secretary, Lawrence Summers.  Summers then met with Fannie Executive Vice President Robert Zoellick to strategize how to deal with the report.  Before joining Fannie, Zoellick had been a former senior aide to James Baker when he headed the State Department and Treasury under Ronald Reagan.

Summers would later serve as Treasury secretary for two years under Bill Clinton.  After serving in that role, Summers would return to his Harvard professorship.  Later, most ironically, he would take a leave from Harvard to be President Obama’s economic advisor in the White House, where he designed the first stimulus package to deal with the collapse of the housing bubble, which was caused in large part by Fannie being allowed to continue as a quasi public institution after Summers had quashed the report recommending the opposite.

When Summers and Rubin had worked together at Treasury, they played a key role in the repeal of the 1933 Glass-Steagall Act, the Depression-era law that had kept investment banking separate from retail/commercial banking; that is, it kept banks from using depositors’ money to make the kind of gambles that Goldman Sachs did with mortgage-backed securities, which were a major cause of the housing bubble and collapse.

Rubin had been the co-chairman and board member of Goldman Sachs before becoming Treasury secretary.  One of his fellow executives at Goldman was Jon Corzine, who would later buy the U.S. Senate seat in New Jersey.  He subsequently lost the seat and became chief executive of the Wall Street firm MF Global, which he quickly ran into bankruptcy and improperly used investor money as it was crashing and burning.

Rubin would go on to be a special advisor to Citigroup and serve as its temporary chairman.  In the couple of years he was there, Rubin received more than $100 million in cash and stock.

One of Rubin’s acolytes was Timothy Geithner, who, in 2003, became head of the New York Fed, the second most powerful position within the Federal Reserve after the Fed chairman and the one that has always been most closely allied with Wall Street banks.  In fact, the committee that selected Geithner consisted of many of the executives whose institutions would later be bailed out by the Treasury Department after Geithner became Treasury secretary under President Obama--the very same president who engages in class warfare, lambastes Wall Street, and has probably taken more bags of campaign contributions from Wall Street than any other president in history.  While at the New York Fed, Geithner protected the lucrative special privileges that Fannie had with the government and was a proponent of banks expanding into exotic derivatives.

All of the foregoing destroyers of the wealth of the middle and lower classes should be cleaning commodes with toothbrushes.  Astonishingly, however, most of them are still members in good standing with brie and pate eaters, and many of them still have political power.  Rubin, for example, has received plaudits for his board positions at nonprofits, including one with the mission of fighting poverty.  A master of financial leverage, he uses leverage to keep his good name.  It works like this:  Take over $100 million of compensation you don’t deserve, help to cause Americans to lose trillions in equity, and then be praised by moronic New York and Washington high society for contributing relatively paltry amounts to nonprofits and serving on their boards.

A special prison cell and toothbrush should be assigned to Alan Greenspan.  In 1965, he wrote an article for Ayn Rand’s “Objectivist” newsletter about the danger of central banks--namely, how politicians use them to print money and debase the currency so that they can give stuff to voters without taxing them for it.  Later, of course, he would sell his libertarian principles and soul in exchange for the chairmanship of the very institution that he had warned about. In that job, he was instrumental in fueling the housing bubble through his monetary policy of low-interest rates, through his defense of Fannie, through his denial that a housing bubble was forming, and through his advocacy for repealing Glass-Steagall, joining with three Republicans in the repeal effort:  Phil Gramm of Texas, Jim Leach of Iowa, and Thomas J. Biley of Virginia.

Greenspan made what sounded like a free-market argument for repealing Glass-Steagall.  Surprisingly, as smart as he was, Greenspan wasn’t smart enough to understand that banking is not a free market, especially traditional consumer and commercial banking.  Banks are part of the Federal Reserve cartel, franchises of the Treasury, and licensed dealers in government credit and fiat money.  Unlike the production of green beans or shoes, the production of money is a monopoly of the government and not a free market.  For there to be a truly free market in banking, banks would have to be allowed to issue their own currency, establish their own capital requirements, and not use federal deposit insurance to assure depositors that their deposits are safe.

Academics also played an role in the housing bubble and subsequent financial crisis.  Two noted ones were Joseph Stiglitz, a Nobel Prize winner in economics, and Peter Orszag, who would later head the Congressional Budget Office under President Obama.  In 2002, they published a paper at Fannie’s request to silence critics of the GSEs by showing that Fannie and Freddie did not pose significant risks to taxpayers.  To his credit, one of those critics was President George W. Bush, whose administration tried but failed to reign in the GSEs. (On the other hand, Bush had earlier fallen for the notion that it would be good for the country if home ownership increased.)

Also playing a role was the Basel Committee, which has the mission of setting banking policies for its member countries, including France, Germany, Italy, Japan Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.  The committee adopted banking guidelines and capital requirements that allowed banks to treat mortgage-backed securities as less of a risk than they actually were.

Similarly, the three rating agencies of Standard & Poor’s, Moody’s, and Fitch Ratings, which had been encouraged by the government to corner the ratings market, did not conduct the proper research on the securities and gave them higher credit ratings than they deserved.

There were scores of other players in this tragedy, some with major roles and some with minor ones.  Below is a sampling:

• Paul Pelosi Jr., the son of Speaker of the House Rep. Nancy Pelosi (D-CA), had worked as a mortgage broker and sales manager for Countrywide Financial, the disreputable and discredited mortgage company.

• Tim Stewart, a legislative aide to former Sen. Robert Bennett (R-UT), had run the Salt Lake City office of Fannie Mae.  Bennett’s son Rob also had worked in the office. 

• It was a similar story in South Dakota, where an aide to Democrat Sen. Tom Daschle had run Fannie’s office there.

• Speaker of the House Newt Gingrich (R-GA) not only had secured a position for one of his aides at Fannie’s headquarters in Washington, but he also praised the company at a Fannie function in Atlanta in 1995:  “Fannie Mae is an excellent example of a former government institution fulfilling its mandate while functioning in the market economy.”  (Fannie was not a “former” institution.)

• One of Fannie’s most rabid supporters, Rep. Barney Frank (D-MA), had secured a position at Fannie for his gay partner, Herb Moses.  Working there for seven years, Moses rose to the position of assistant director for product initiatives.  Two of the initiatives were to relax standards on home improvement loans and mortgages for small farms.

• Even Frank’s mother got some of Fannie’s largess.  A Boston nonprofit group she co-founded was given $75,000 in grants by Fannie, and was also awarded the “Fannie Mae Maxwell Award of Excellence.”

• Sen. Christopher Bond (R-MO) spoke at the opening of a Fannie office in Kansas City:  “Fannie Mae is committed to making the nation’s mortgage finance system work better for the people of Kansas City.  I look forward to seeing thousands of families rewarded with new housing opportunities through this partnership.”

• In 1997, when New York Governor Andrew Cuomo was the director of HUD, he encouraged Fannie and Freddie to buy more subprime mortgages:  “GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas.”

• Former chief of staff in the Obama White House was on Fannie’s board during the 1990s.

• New York Democrat Carolyn Maloney topped all of them in poor judgment.  At a congressional hearing she praised Fannie for “revolutionizing home ownership” and then asked why the GSE structure couldn’t be brought to childcare by giving Fannie and Freddie the authority to buy “childcare facility mortgages.”

• And the chutzpa award goes to former Sen. Chris Dodd (D-CT), who co-sponsored with Barney Frank the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  This is the same Chris Dodd who was a protector of Fannie while in office and wanted every ne’er-do-well in America to be given a mortgage.  Equally amazing, after he left office, the Motion Picture Association of America hired him as its president.

For the rest of the sordid story, I encourage you to read Reckless Endangerment

In closing, I’ll leave you with a question:  Why aren’t these scoundrels in Sing Sing scrubbing the commodes with toothbrushes?

Mencken’s Ghost is the nom de plume of an Arizona writer who can be reached at