August 15, 2022

Books of The Times: Nation Goes on Its Merry Way to Ruin

The authors are forthright in their intentions. They are angry about the “outsized ambition, greed, and corruption” that led to “economic Armageddon,” as the book’s subtitle puts it. They view the actions that prompted the meltdown as reprehensible and regret that few of the perpetrators have been held accountable.

In a direct writing style familiar to those who follow Ms. Morgenson’s Sunday “Fair Game” column, the authors piece together the rapid rise in high-risk mortgages and the swift collapse of the complex financial scaffolding that supported them. Ms. Morgenson joined The Times in 1998 after working at Forbes, Money and Worth magazines and won a Pulitzer Prize in 2002 for her coverage of Wall Street. She also worked as a broker at Dean Witter. Mr. Rosner is a partner at Graham Fisher Company, an independent research firm, and worked for many years at Oppenheimer Company.

Drawing on their deep expertise, the authors ably trace the legal and regulatory changes that stoked the unsustainable housing boom. With a few exceptions, the book focuses more on policy and power than on personalities, and it illuminates several small decisions that later had huge, unintended consequences. For example, a modification in the handling of bundled loans, approved by the international Basel Committee on Banking Supervision in 2001, more than any other factor, “opened wide the floodgates for the mortgage securities mania,” the authors write.

The book begins in 1994 with President Bill Clinton’s kicking off a public-private partnership to extend homeownership to more Americans. At that time 64 percent of Americans owned their homes; within a decade the percentage would rise to nearly 70. Yet an idea that sounded so appealing would soon be exploited by institutions and individuals who detected the potential for astounding profits.

Ms. Morgenson and Mr. Rosner finger the usual suspects: subprime mortgage lenders, credit-rating agencies, investment banks, politicians, the Federal Reserve.

But the institution to which the authors devote the most ink is Fannie Mae, the government-supported enterprise created in 1938 to make home loans more accessible. And the person they hold most accountable is someone whose role in the “mortgage maelstrom” has until now “escaped scrutiny”: James A. Johnson, Fannie Mae’s chief executive from 1991 to 1998. Mr. Johnson was the “anonymous architect of the public-private homeownership drive that almost destroyed the economy in 2008,” the authors assert. “He was especially adept at manipulating lawmakers, eviscerating regulators and leaving taxpayers with the bill.”

The description of Mr. Johnson’s role is damning — and although the account lacks his perspective, it is thoroughly supported through scores of interviews with academics, government officials and industry executives, some of whom are granted anonymity. While Mr. Johnson didn’t respond to interview requests over five months, according to the authors, they overcome this obstacle with impressive use of public records and secondary sources, carefully attributed in the text or described in a two-page “Notes on Sources.” Still, more specific references in endnotes would have strengthened the book’s authority, and in some places would have improved the narrative’s flow.

“Reckless Endangerment” will never be mistaken for summer beach reading, but the authors explain the minutiae clearly, pausing often to explain a dense financial concept or to inject a clarifying metaphor. Lax regulation is effectively likened to “allowing the lead-footed drivers to set speed limits.” Less effective is a comparison of Wall Street’s hope for profits from subprime lenders to “Elmer Fudd envisioning a duck à l’orange dinner when stalking Daffy Duck.”

A particular strength of this book is the number of doubters the authors unearthed: the unsung government analysts, public lawyers and private researchers who dared to question policy decisions and stand up to the formidable “housers,” as the true believers in government subsidies for home ownership are called.

The reader has a sickening sense of missed opportunity as these prophets are ignored or, worse, vilified, by those in a position to halt the mania. When a Congressional Budget Office researcher in 1995 reveals the multibillion-dollar extent of the government’s subsidy to Fannie Mae and its brother institution, Freddie Mac (and that one-third of these benefits never reached borrowers), he suggests that “Congress may want to revisit the special relationship.” Unable to assail the merits of his analysis, outraged Fannie Mae executives resorted to ad hominem attacks, calling budget office officials “digit-heads” and “economic pencil brains.”

One of the doubters was Mr. Rosner himself, who in a 2001 report warned about the potential for economic ruin for American consumers as they took on more and more home debt. Washington regulators met his 30-page paper “with a dismissive silence,” the authors say.

Unlike some whodunits, “Reckless Endangerment” has no tidy ending. Millions of homes remain in foreclosure, high unemployment persists, and, the authors say, Congress failed to pass truly corrective legislation when it had the chance. Although Ms. Morgenson and Mr. Rosner hope that shining a light into the dark corners of this “economic Armageddon” might prevent another one, they sadly conclude that something similar “most certainly” will happen again.

Pam Luecke is the Donald W. Reynolds professor of business journalism at Washington and Lee University in Lexington, Va.

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