Archive for Monday, July 4, 2011

Book details U.S. mortgage debacle

July 4, 2011


The louder he talked of his honor, the faster we counted our spoons.” — Emerson

The louder they talked about the disadvantaged, the more money they made. And the more the financial system tottered.

Who were they? Most explanations of the financial calamity have been indecipherable to people not fluent in the language of “credit default swaps” and “collateralized debt obligations.” The calamity has lacked human faces. No more.

Put on asbestos mittens and pick up “Reckless Endangerment,” the scalding new book by Gretchen Morgenson, a New York Times columnist, and Joshua Rosner, a housing finance expert. They will introduce you to James A. Johnson, an emblem of the administrative state that liberals admire.

The book’s subtitle could be: “Cry ‘Compassion’ and Let Slip the Dogs of Cupidity.” Or: “How James Johnson and Others (Mostly Democrats) Made the Great Recession.” The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.”

The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”

In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.

There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could offload risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion.

As housing prices soared, many giddy owners stopped thinking of homes as retirement wealth and started using them as sources of equity loans — up to $800 billion a year. This fueled incontinent consumption.

Under Johnson, an important Democratic operative, Fannie Mae became, Morgenson and Rosner say, “the largest and most powerful financial institution in the world.” Its power derived from the unstated certainty that the government would be ultimately liable for Fannie’s obligations. This assumption and other perquisites were subsidies to Fannie Mae and Freddie Mac worth an estimated $7 billion a year. They retained about a third of this.

Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. That year Johnson’s $1.9 million bonus brought his compensation to $21 million. In nine years, Johnson received $100 million.

Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map.

By 2003, the government was involved in financing almost half — $3.4 trillion — of the home-loan market. Not coincidentally, by summer 2005, almost 40 percent of new subprime loans were for amounts larger than the value of the properties.

Morgenson and Rosner find few heroes, but two are Marvin Phaup and June O’Neill. These “digit-heads” and “pencil brains” (a Fannie Mae spokesman’s idea of argument) with the Congressional Budget Office resisted Fannie Mae pressure to kill a report critical of the institution.

“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.

Morgenson and Rosner report. You decide.

— George Will is a columnist for Washington Post Writers Group. His email address is


beatrice 3 years, 10 months ago

Yes, because we all know what liberal bodies the lending institutions in this country that lent all the money for these homes are.

You honestly can't be serious and buy into this partisan reporting, can you?

cato_the_elder 3 years, 10 months ago

You can't face the truth, as reported by Morgenson and Rosner and known to thinking people for some time, that the root cause of the subprime crisis was government itself.

Read the book.

just_another_bozo_on_this_bus 3 years, 10 months ago

The causes of this collapse were many, and included both Democrats and Republicans, but it mostly included our biggest financial movers and shakers, nearly all of them. The fault does not lie with the goal of making home ownership available to as many people as possible. It lies with corruption of our financial institutions, and Fannie Mae was just the tip of the iceberg.

Here's a book that looks at the situation honestly and comprehensively, rather than the one George reviews, which is clearly little more than Republican propaganda.

jayhawklawrence 3 years, 10 months ago

I believe the jury came back a long time ago and gave the right judgement on this one already.

Democrats and Republicans are guilty of robbing the American people through the gross misuse of the public trust and the mishandling of public property. It continues to this day, they just found different ways to lie to us.

The fact that George Will and others continue to leap at ways to put a wedge between their political party and these shameful acts simply means they are worried about the American people having long memories and historical revisionism is useful when you have an electorate that doesn't seem to mind when you skew the facts a little bit.

Corey Williams 3 years, 10 months ago

Most people don't know the facts, and most have short memories (remember the airline bailouts in 2001?) so any kind of historical revision is beyond their grasp. They just know what they are told by whichever side they listen to.

just_another_bozo_on_this_bus 3 years, 10 months ago

"It's too bad government fatkats forced bank fatkats to give money to people that had no right to it."

They didn't. As a matter of fact, in a very large percentage of loans to low-income borrowers, there were FHA-backed loans available that had more stringent requirements and better terms for the borrowers. But those couldn't be packaged up and sold off on the derivatives market.

Corey Williams 3 years, 10 months ago

Yep. That's what it was. It wasn't that banks on their own that started offering people larger mortgages than they could afford to buy bigger houses that they didn't need. The government forced them to. Oh, those heady days in the early 2000's when we were told in advertising that you could get a $250k house for less than you pay in rent. Or when you didn't need to prove employment or wages. And since Republicans had the house and senate from 96-06, couldn't they have done something? Where did the PMI go?

no_thanks 3 years, 10 months ago

What have the Democrats accomplished since taking control of the House and Senate in '06? Nothing. Both parties were to blame, both parties lack leadership, and both parties are more interested in their Party than the Country as a whole. Given that, in my opinion, it means we, the voters, are truly to blame for not using our vote to create real change.

just_another_bozo_on_this_bus 3 years, 10 months ago

It says part of it, because the leaders of his financial team, Larry Summers and Robert Rubin in particular, were primarily doing Wall Street's bidding. But they were working directly with the Republicans in Congress, particularly Phil Gramm.

gkerr 3 years, 10 months ago

Bozo, Larry Summers and Robert Rubin are Democrat insiders. Rubin was Clinton's treasury secretary. Phil Grahm a republican, also Kit Bond a republican but most politicians pushing the scheme were Democrats- Black Caucus members, New York Bankers like Robert Rubin, demogouges like banking committee chairman Barney Frank, and Senator Chris Dodd (on the take from Banking and mortgage interests.). Most of the miscreants were Democrats. That is a Papal Fact, can't be white washed or ignored. You progressive Dems own this stinking mess.

However, Government tends to grow and grow under all regimes and administrations. Republicans join the corruption when they get to DC and ply the levers of power- they simply can't resist and nearly all become corrupted or at least caught up in the compromises of the corrupt system also. All politicians must be disciplined, must stand accountable to the constitution and the citizens who elect them. We must not allow them to make law in order to enrich their powerful friends and relatives, who turn around and enrich them and their families. How in the world do you think a penniless and shameless politician from Arkansas became rich with about 100 million in assets after ascending to the presidency? How have the Bush's maintained their wealth and the Kennedy's by gaming their portfolios from inside the political system? Why do they seek power, and cling to it?

Because it pays to do so.

just_another_bozo_on_this_bus 3 years, 10 months ago

"Most of the miscreants were Democrats. That is a Papal Fact, can't be white washed or ignored."

Partisan idiocy is still idiocy, no matter how fervently you argue it.

beatrice 3 years, 10 months ago

Yes, check out George's blog. He nailed this one. (I'm critical when he misses, but I'll give him his props when they are in order.)

Steve Jacob 3 years, 10 months ago

While blaming both parties, let's remember the height of the bubble was after 9/11, and we fought two wars without a tax increase. How do we raise cash? By inflating home prices and giving loans to everyone.

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