Book Review: Reckless Endangerment

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
by Gretchen Morgenson and Joshua Rosner
Book review by Raymond Dague
posted September 3, 2011

For anyone puzzling over where blame lies for the financial meltdown of the late summer of 2008, this is a book to read. The answer might be surprising. Gretchen Morgenson, the principal author, is a business and financial editor and a columnist for The New York Times. The book is a detailed account of what, who, how, and why behind the financial meltdown which nearly plunged the country into a second great depression in the waning days of the George W. Bush presidency.

The general assumption of many, especially partisans with no love for President Bush, is that because it happened toward the end of his eight year presidency his policies must have been at fault. President Obama rarely lets a week go by without blaming the current economic problems on President Bush, or only slightly more subtly, “the situation which we inherited.” Yet the problem runs far deeper than blame of the Republican administration during which it occurred.

The 2008 financial crisis can be traced directly to the early years of the presidency of Bill Clinton. President Clinton in 1994 proclaimed the need for more Americans to be homeowners. He set the goal of 70% of the populace living in homes they own. He relentlessly pursued that policy by causing his young secretary of Housing and Urban Development, Andrew Cuomo, to have his bureaucracy issue regulations which encouraged banks and other lending institutions to drop the standards for home mortgages. That included a virtual elimination of the 20% down payment which homeowners needed to qualify for a mortgage, and the age old wisdom enshrined in the banking industry that the homeowner’s monthly mortgage payment should not exceed 25% of his take home pay. With a few regulation changes, and accusations that banks were engaging in “redlining” discrimination against inner city neighborhoods, the nation’s traditional banks were quickly persuaded to make mortgage loans which a few years earlier would have resulted in a quick mortgage rejection letter.

New lenders came to prominence such as Countrywide Financial, United Companies Financial, NovaStar, and Fremont Investment and Loan. They made billions of dollars on these newly minted mortgages to borrowers who traditionally could not have gotten a mortgage to buy a house. Bankers called the good mortgage prospects, prime candidates. This new class of borrowers became known as sub-prime. These sub-prime mortgages were issued by the lenders and then sold in huge blocks to Fannie Mae and Freddie Mac. These two private corporations are “government-sponsored enterprises,” meaning that they were in 1994 private corporations, but ones which the public largely perceived to be guaranteed by the full faith and credit of the United States government.

During the Clinton years Fannie Mae, the larger of the two, was run by James A. Johnson. Johnson successfully lobbied congress to see that his agency was never effectively regulated. Johnson and the executives of his organization and the lenders made millions each year in salaries and bonuses. But Fannie Mae and the many lenders which sold their mortgages to Fannie Mae were undercapitalized. They made risky loans to people who could not afford them. When these sub-prime homeowners started defaulting in large numbers, the whole house of cards came down, and voila, the financial crisis of 2008. Most of those lenders are now in bankruptcy and Fannie Mae and Freddy Mac are now under government control and bailout. Johnson and his fellow executives got off while the American taxpayers pay the bills.

While all of this was unfolding the congress, mostly run by the Democrats, was asleep at the switch. Senate Finance Committee Chairman Christopher Dodd, Democrat from Connecticut, and House Financial Services Chairman Barney Frank, Democrat from Massachusetts are mentioned prominently in this book as being cosy with Johnson and Fannie Mae. Perhaps the ultimate insult added to injury is when these two powerful Democrats devised the congressional response to the crisis. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to supposedly insure that such a financial crisis could never happed again. But the new law, despite its massive size and scope, utterly failed to address the to-big-to fail institutions such as Fannie Mae. The law did nothing to increase accountability of those running these huge financial institution, nor did it even address the issues of how to resolve the insolvent Fannie and Freddy situation. When such behemoth unmanageable financial institutions get in trouble in the future, the government (meaning the taxpayers) will have no alternative but to again bail them out, or alternatively to let them fail and then face national financial collapse as we did in the summer of 2008.

If one expects partisan reasons given from the left side of the political spectrum from this New York Times reporter, they will be greatly disappointed by this book. As for many of the cast of characters who were responsible for allowing all of this to happen on their watch, many are in the Obama Administration or with close ties to the current president. So much for the penchant of the current administration to blame today’s financial problems on “the situation which we inherited.” To a great degree, the people who allowed the current mess to happen on their watch are now serving in the current administration.