In three-hundred pages, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, a financial service analyst and expert on the housing market, present a powerful indictment of high-profile individuals who wittingly undermine the U.S. and global financial systems in their pursuit of vast riches.
Their book, "Reckless Endangerment", explains the origins of the financial crisis, the political and economic gains of blind commitment to homeownership, and the betrayal of American taxpayers—most notably, those at the bottom-end of the economic ladder.
Not one of the individuals they detail has gone to jail. Nor will they ever likely pay penance. In fact, some still preside over our political and financial systems.
All remain wealthy (extremely wealthy in some cases), if suffering somewhat-damaged reputations. Bank of America, at the time the new owner of Countrywide Financial, covered, for example, most of the SEC's $67 million fine against Countrywide's CEO Angelo Mozilo, accused of insider trading. Mr. Mozilo's net worth totaled more than $500 million.
The authors deliver substantial evidence, much of it gleaned from years of investigative interviews and note-taking, against people such as Jim Johnson, Robert Rubin, Barney Frank, Chris Dodd, Timothy Geithner, and Mr. Mozilo. Their laundry list includes both Democrats and Republicans, and leaders of the biggest financial institutions in the world.
In particular, they assail Fannie Mae and Goldman Sachs, and the relationship the two institutions form. Both established and exerted considerable market power that prioritized no one but their management teams and employees. Their pretense of serving customers and doing social good was pure hypocrisy—even criminal, as the authors suggest.
Jim Johnson, who transformed Fannie Mae into a personal ATM, left the GSE (Government Sponsored Enterprise) in 1998 a decade before the crisis. Nevertheless, he did more than anyone to position the organization for scandal and abuse. Shortly after resigning from Fannie Mae, he became a board member of Goldman Sachs and head of the firm's compensation committee, a role he performed through 2010.
Likewise, and at the same time, Stephen Friedman, who had run Goldman Sachs from 1994 to 1996, chaired Fannie Mae's compensation committee. His tenure as a board member included Fannie Mae's purchase of a Goldman deal designed to inflate executive compensation, which, as later played out, perpetrated accounting fraud.
"Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street," write Ms. Morgenson and Mr. Rosner. "If mortgage originators like NovaStar or Countrywide were the equivalent of drug pushers hanging around a schoolyard and the ratings agencies were the narcotics cops looking the other way, brokerage firms providing capital to the anything-goes lenders were the overseers of the cartel."
While the authors highlight Peter Orszag and other noted economists who endorsed the GSEs despite overwhelming evidence contradicting their economic security, they also showcase less well-known individuals who dared to expose the organizations' systemic risk. These include Marvin Phaup and June O'Neill of the Congressional Budget Office, and Armando Falcon, who directed the Office of Federal Housing Enterprise Oversight ("OFHEO"), the regulatory body overseeing the GSEs.
Beginning with President Clinton's political pursuit of homeownership in the early 1990s and culminating in the repeal of Glass Steagall, the country adopted a big institution mindset, where public-private partnerships could provide homes to any person with any credit rating and Wall Street could package high-risk debt and redistribute it as zero-risk debt—of course, with the blessing of the ratings agenices.
At the same time, global events realigned capital flows, a consequence of the Cold War ending and a massive peace dividend taking effect. Times were good, but, by decade's end, clear warning signs had surfaced: the Russian debt crisis, the collapse of Long-Term Capital Management, and the first demise of the subprime market.
After the dotcom meltdown and the mild recession that followed, Alan Greenspan and the Federal Reserve pursued historically low rates. The Wall Street machine kicked in at this point, extracting every penny possible from the U.S. housing market and reaping huge fees at each stage of the securitization process.
When consumer savings rates should have risen, they fell. But everything was safe, according to Mr. Greenspan. The bigger the financial institution, the more it could self-regulate. Risk models, he and others pointed out, were more sophisticated than ever before, and derivative instruments could offset sharp market contractions without having to increase capital ratios.
In 2007, the game ended. Still, we feel its repercussions. Many, including the authors, argue that the financial system and the political process haven't changed. Wall Street's record profits against the backdrop of a struggling economy in the two years following the crisis certainly support this.
What has changed is consumer appetite. High unemployment and a fear of indebtedness have curtailed aspirations of second homes, super-sized SUVs and floor-to-ceiling TVs. Until the consumer regains his confidence, the next bubble might be some time off. But if lawmakers and regulators haven't actually altered the system—restricting too-big-to-fail and breaking apart and privatizing Fannie Mae, for example—then the next crisis could closely resemble the one we've just experienced.
Blame, Ms. Morgenson and Mr. Rosner argue, can and should be made. Beyond anyone else, Wall Street, the mortgage lenders, Fannie Mae and to a lesser extent Freddie Mac, and a handful of politicians understood the game and its complexities.
To win that game, they often crossed ethical and, in some cases, legal boundaries.
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