Host, Yves Smith:
Reckless Endangerment describes the players that helped create the housing bubble and bust that were at the heart of the financial crisis. Gretchen Morgenson and Josh Rosner focus on how regulators and other officials were complicit by promoting liberalized housing finance as a way to increase homeownership. Their account chronicles how a naïve vision of the American Dream, that of homeownership as the foundation of upward mobility and stable communities, turned into a nightmare in the hands of a growth driven and increasingly predatory mortgage complex.
Jim Johnson, who was a Mondale operative, one-time Bill Clinton, political consultant, and CEO of Fannie Mae from 1991 to 1998, was a major architect of a powerful alliance that sought and obtained more and more government support for housing. His immediate focus was to deepen Fannie’s relationship with the government to protect its implied state backing. Johnson bought support of his aggressive growth plans by sponsoring large-scale programs to target low income borrowers. These initiatives, while they sounded benign, often amounted to radical experiments that over time gutted many of the traditional guidelines for sound lending. And the need for these changes was often exaggerated. Some of the seminal studies that found that blacks and minorities were incorrectly denied mortgage finance were nowhere near as clear cut as Fannie and its allies suggested.
Johnson also used Fannie’s huge profits to hire virtually every independent housing analyst so as to limit criticism, and went savagely after anyone who questioned the GSE’s efforts. Fannie also formed the Fannie Mae Foundation, which siphoned funds to associations linked to favored politicians, in effect using government supported profits to protect and extent its franchise. The only party able to stand up to its onslaught was the Congressional Budget Office, which had the temerity to produce an analysis that showed that a full 1/3 of the huge value of Fannie’s government subsidy was going to executive pay and shareholders, rather than its professed goal of making housing more affordable.
An unduly accommodative regulatory climate helped supercharge overly aggressive lending. [cont’d.] (more…)