Book Review: “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Let to Economic Armageddon,” by Gretchen Morgenson and Joshua Rosner.
Reckless Endangerment tells the story of how crony capitalism led to the financial crisis of 2008. Morgenson is a business reporter for the New York Times and Rosner a research consultant on the mortgage industry. Both conducted interviews concerning the mortgage industry and Wall Street over the last decade.
Reckless Endangerment identifies the powerful people whose actions led to the financial crisis. In the wake of the Wall Street bailouts, “the American people realize they’ve been robbed. They’re just not sure by whom.” The authors explain in detail the key players who profited from the decades-long relationship between Wall Street and Washington.
The financial collapse of 2008 resulted in part from the concept of public-private partnerships. Rather than serve as a neutral enforcer of the rules, the federal government became a “partner” of Freddie Mac and Fannie Mae. Freddie and Fannie are GSEs (government sponsored enterprises) benefitted from the guarantee of government credit long before the bank bailouts of 2008-09.
The book details the career of James A. Johnson, who served as CEO of Fannie Mae from 1991 to 1998. Johnson came to Fannie Mae from politics and Wall Street. Johnson served as the campaign manager of Walter Mondale’s 1984 presidential campaign and also worked on George McGovern’s 1972 presidential campaign. From 1985 to 1990, Johnson became a managing director at Lehman Brothers.
Johnson recognized that defending and expanding Fannie Mae’s relationship with the federal government would prove lucrative. Many of Fannie’s political champions were Democrats, including Barney Frank and Maxine Waters. One of Johnson’s initiatives established regional Fannie Mae Partnership offices intended to promote ever-expanding homeownership by working with elected officials. These regional offices became a political network designed to thwart any efforts to reign in Fannie Mae. In 1995, the new House Speaker, Rep. Newt Gingrich, attended the opening of the Atlanta office. Gingrich hailed “Fannie Mae as an excellent example of a former government institution fulfilling its mandate while functioning in the market economy.” The GSEs, however, existed to rely on government support, not compete on an equal playing field.
Fannie Mae also used its regional offices to hire former congressional staffers from the offices of men like Sen. Robert Bennet (R-Utah)(defeated by the liberty movement in a 2010 GOP primary) and Sen. Tom Daschle (D-N.Dak.) who became Senate Majority leader and nearly became a member of President Obama’s cabinet. Fannie Mae also hired Herb Moses, Rep. Barney Frank’s partner. Rep. Frank became a key defender of both Fannie and Freddie Mac.
Other financial firms also benefited from lobbying Congress and the White House. Sandy Weill the then-CEO of Travelers Group led the push to repeal the Glass-Steagall Act. Clinton Secretary of the Treasury Robert Rubin was instrumental in the push to allow commercial banks to combine with insurance companies and investment banks into firms “too big to fail.” Rubin became the Vice-Chair of Citigroup shortly before the full repeal of Glass-Steagall. Glass-Steagall’s repeal did not create a “free market” banking system. Banks took greater risks, with ever less financial transparency. As events proved, these mega-firms could count on government support to privatize their profits while piling their losses on the U.S. taxpayer. Long-Term Capital Management failed in 1999. The Federal Reserve responded with a bail-out, creating the conditions for future bail-outs. At the same time, the Fed expected the banking industry to do the right thing with little or no oversight. Capital reserve requirements were watered down, allowing ever greater leverage, especially when combined with accounting gimmicks to manipulate profits & losses and potential liabilities. Such policies were inconsistent with the sort of ad hoc government bailouts that followed.
Reckless Endangerment also chronicles the story of some of the subprime lenders, such as Countrywide Financial, NovaStar, and Fremont, all companies that pursued loose lending standards in search of short-term profits.
Many firms engaged in accounting fraud, including Fannie Mae. In his last year as CEO, James Johnson received millions more in bonuses due to manipulations of the timing of earnings. Johnson’s successor, Franklin Raines, suffered the consequences of such shenanigans. Fannie Mae was later forced to restate earnings by $6.3 billion. Still, Raines was allowed to resign and received substantial bonuses at his departure. Years later, Raines paid millions of dollars in civil penalties. The penalties were a small fraction of his total compensation from Fannie. In 2008, Johnson was appointed Senator Barack Obama’s three-member Vice-Presidential candidate search committee, but resigned after the McCain campaign made his involvement an issue.
The authors contend that “the failure to hold central figures accountable for their actions sets a dangerous precedent.” Many of those responsible for the financial debacle still remain in positions of influence. Reckless Endangerment provides a glimpse of the crony capitalism that is motivating average citizens to take action. It is not the complete story of the financial crisis, but is one element of the problem that should be addressed. Instead of recognizing the shortcomings of such purported “partnerships,” Congress and the Obama Administration are creating more regulatory agencies with even more layers of bureaucracy. Read Reckless Endangerment, then you can decide whether you believe the political system is capable of refining crony capitalism and public-private partnerships into a workable economic system.