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Reckless Endangerment: How Outsized…
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Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to… (2011)

by Gretchen Morgenson, Joshua Rosner

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Showing 1-5 of 6 (next | show all)
What is to be added to Newsie Q's review, except to update it....The bad guys are still around since the 2011 date that he wrote the reviews. Summers considered for the red head, Anyone who lost money in the meltdown should read this book.... ( )
1 vote carterchristian1 | Aug 29, 2013 |
Morgenson and Rosner do a masterful job of tracing the roots of the financial crisis to a series of public policy decisions that consistently gave precedence to political goals over market forces in allocating credit. Curiously, however, they seem to argue that disaster could have been avoided if only the politicians could have played a greater role in thwarting the self-correcting mechanisms of the market. A reader, on the other hand, might well ask if our economy and financial system would have been better off without the self-interested ministrations of politicos like Barney Frank and Christopher Dodd. Financial markets contain self-correcting mechanisms; they are not painless, but they work. If these had not been deliberately short-circuited by political intervention, it is likely that the real estate bubble would have been deflated much earlier, with less pain and much less expense.

The culture of corruption that surrounded the housing GSEs (Fannie and Freddie) was no accident: the abuses were deliberately embraced as lenders were coerced into suspending time-honored ways of extending credit in order to achieve politically defined goals. Practices that are now retrospectively condemned (low doc/no doc mortgages, zero down mortgages, and many more) were embraced by people like President Clinton as ways of providing credit to people who had previously been excluded from ownership. The GSEs and their supporters argued that old lending standards that emphasized cash flow, collateral value, credit history, and borrower character had to be replaced by new ways of lending in order to achieve the socially desirable goal of increased home ownership. Indeed, the whole concept of securitizeable sub-prime mortgage product was designed to provide more liquidity to a market that most local bankers had sense enough to avoid. As the process accelerated, lenders and Wall Street were certainly complicit, and they should have resisted. But they were smart enough to recognize the risks of NOT aligning their practices with the goals of those who controlled the levers of power. For example, more than one bank was forced to pay "CRA ransom" (in the form of loans extended to non-qualified borrowers) as a price for Fed approval of its merger application. And, as Morgenson and Rosner make clear, it was very dangerous for anyone in government or the private sector to oppose Fannie or Freddie when they were at the peak of their power. Retribution was swift and brutal, and powerful interests on Capitol Hill were quick to snap to attention when the perceived interests on the GSEs were threatened. Too much power and patronage were at stake, and the GSEs maintained both slush funds and local offices throughout the country to make sure that their friends were rewarded and their enemies punished.

This is an important story. Much of it flies in the face of the 'conventional wisdom' that has developed around the financial crisis. Sadly, it is short on insightful analysis, and many questions are left unanswered. For instance, in assigning blame, the authors totally overlook the role of borrowers who eagerly lied on applications. And, while the authors offer tantalizing hints, they never directly confront the reasons behind the decision not to criminally prosecute men like Jim Johnson and Frank Raines, the two Democratic Party hacks who led Fannie Mae's during the lead-up to the housing crisis, enriching themselves even as they brought financial devastation to millions of families. Also, the account of the role of financial derivatives in contributing to the crisis is badly bungled, merely rehashing common prejudices and misconceptions. Although Morgensen is a respected business reporter, she is apparently unaware of the real benefits that had been created for consumers by financial technologies like securitization and credit scoring. These innovations made it possible to make credit available to previously underserved individuals and communities; their abuse came only when market discipline was deliberately abandoned in order to achieve political goals.

The devastation caused by the financial crisis is ongoing, and our ability to emerge from it depends in large measure on an informed understanding of the choices and policy decisions that led us to the brink of financial disaster. Attributing the crisis simply to 'market failure' or 'Wall Street greed' does little to enhance or understanding. Morgenson and Rosner have provided an account that points in the right direction. But it fails to go far enough. ( )
1 vote MarkStickle | Oct 28, 2011 |
Just when I thought there was nothing more I needed to know about the 2008 financial meltdown, I read Reckless Endangerment. Although there are plenty of bad apples in this book, the main baddie is probably James Johnson, the former CEO of Federal National Mortgage Association, affectionately (or not) known as Fannie Mae.

I remember with no fondness the night I learned about the US government’s taking over the reins at Fannie Mae (and Freddie Mac, its sibling company) during the financial crisis. My first thought was, “this can’t be a good thing,” and it gave me a sick feeling in the pit of my stomach. Fannie and Freddie are government-sponsored enterprises (GSEs), even though they are publicly traded companies. For years and years, both entities took advantage of a widely shared perception that if they got in too much trouble the government would bail them out, while denying that vociferously.

They had plenty of other advantages over other publicly traded companies – and their executives used them to enrich themselves, while spinning tales that they were operating in the best interest of the country and the people they helped buy a piece of American dream—their own homes. Well, we know how that worked out. Why we didn’t see Mr. Johnson and some of his cronies doing a “perp walk” on national television I’ll never understand.

Heroes are few and far between in Reckless Endangerment and what’s particularly maddening is that most of those the villains made out like bandits while the little guys took it in the shorts. It’s easy to see why the Occupy Wall Street protestors are so pissed off. Readers will appreciate the irony that the re-regulation of Wall Street banks comes under the Dodd-Frank Act – when Messrs Dodd and Frank were both relentless defenders of Fannie and Freddie until they weren’t.

This is an ugly story, beautifully told. ( )
2 vote NewsieQ | Oct 20, 2011 |
So what caused the 2008 financial crisis? We know that the direct cause was the meltdown in the US housing market. I think we are still trying to put together the pieces and point the finger of blame. It was a big bubble and the explosive reaction when the bubble burst. It took many different forces to get the bubble so big.

In Reckless Endangerment, Gretchen Morgenson and Joshua Rosner take their turn looking at the outsized ambition, greed, and corruption that lead up to the crisis. They point the finger of blame directly at Fannie Mae and its executives.

The authors portray a company that ruthlessly leveraged the implicit government guarantee to create billions of dollars of shareholder wealth and millions of dollars in executive compensation. They beat the drumbeat of housing as the American Dream. Everyone should get a chance to own their own home. Fannie Mae used their version of the American Dream to bully Congress and their regulators to let them have a very thin capital reserve and to keep their finances very opaque. The authors pin the blame squarely on James Johnson, the CEO of Fannie Mae during the 1990s and his successor, Franklin Raines.

The rating agencies also get some of blame by the authors. I think the rating agencies have not received enough of the blame. Their shoddy rating of debt instruments let them get AAA ratings that they did not deserve. Only a handful of companies and a handful of countries get the top rating. But when it came to real estate backed securities, the rating agencies were handing them out like cotton candy at the state fair.

Institutional investors were looking for safe place for their money that could still earn a coupon. US treasury bonds were paying a very low interest rate. Pension funds and insurance companies determine their funding levels based on a projected rate or return. Many were limited to only invest in the highest quality asset either by regulation or internal policies. That meant they would only buy the top rated bonds.

Banks has to maintain their capital levels based on the quality of the loans/bonds/assets they held. With top-rated bonds, the banks had to retain very little capital. By holding AAA ratted bonds, the banks could retain less capital and put more to work.

The rating agencies were telling them that these mortgage-backed securities were top rated. (They were wrong.)

The vast majority of the book is spent sticking pins in Fannie Mae, their lobbying efforts, and their executives. I agree that Fannie Mae abused its position. I agree that Fannie Mae helped create an attitude that everyone should be a homeowner and everyone should be able to afford to buy a home. But their story comes to crashing halt in 2004 when Fannie Mae gets caught in large scale accounting fraud. Most of the manipulation can be tied directly to triggers for executive compensation.

In 2005 the first signs of bad mortgages were popping up and the buyers for the lower rated pieces of mortgage debt were not buying them. Without those buyers, the mortgage securitization would fail. Fannie Mae was leading the charge up until that point. But it didn’t stop there. That’s why have a problem pointing the finger at Fannie Mae. The mortgage/housing boom kept going.

The authors pull some of the dubious lenders into the book. Countrywide, Novastar, and Fremont all get ripped apart.

It’s not until the last chapter that they hit upon the issue that hyper-inflated the real estate bubble. The buyers for the lowest rated pieces of mortgage-backed securities were not buying as much. In part, this was because the increased quantity of junk they saw ending up in the pools. In part, it may be because they saw the bubble. Then the magic happened.

Wall Street firms packaged the lower rated pieces into new pools and sold those securities. These were the toxic assets. Somehow they convinced the rating agencies that some tranches of this pile of junk could still get the top ratings. Those high rated tranches were sold off to the institutional investors and the real nasty stuff was sold off to more speculative investors. This kept the mortgage securitization pipeline going for two more years.

Why keep going when you could see the bubble? It was their job. There were thousands of jobs tied to originating the mortgages, the warehouse lines that funded them, the organization of the pools and the selling of the final securities. It was not their job to assess the bubble and just stop working. There was no brakeman in the system. The regulators do not have the oversight, the power, or the willingness to stop an asset bubble. (Let’s see what happens with the price of gold.)

The brakes were slammed on when the Wall Street firms realized they were holding on to the lowest rated tranches of the securitizations and they couldn’t get rid of them. They stopped the production. They stopped it fast. In early 2007 warehouse lines were cut off and underwriting standards were suddenly raised to higher (more sensible?) levels.

With the pipeline cutoff, the hyper-inflated housing bubble reached the bursting point. Then mortgage-backed securities investors stopped getting their checks. They realized that their coupon-paying beauty queen was just a pig with lipstick.

I think All the Devils Are Here did a better job of putting all the pieces together and The Big Short did a better job explaining the mechanisms of the mortgage-backed securities industry. If you don’t like Fannie Mae or want to read a story of how corporate greed exploited American politics then Reckless Endangerment should be on your reading list

http://www.compliancebuilding.com/2011/10/06/reckless-endangerment/ ( )
2 vote dougcornelius | Oct 19, 2011 |
The New York Times's Pulitzer Prize-winning columnist reveals how the financial meltdown emerged from the toxic interplay of Washington, Wall Street, and corrupt mortgage lenders.
2 vote SalemAthenaeum | Oct 4, 2011 |
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"In Reckless Endangerment, Gretchen Morgenson, the star business columnist of The New York Times, exposes how the watchdogs who were supposed to protect the country from financial harm were actually complicit in the actions that finally blew up the American economy. Drawing on previously untapped sources and building on original research from coauthor Joshua Rosner--who himself raised early warnings with the public and investors, and kept detailed records--Morgenson connects the dots that led to this fiasco. Morgenson and Rosner draw back the curtain on Fannie Mae, the mortgage-finance giant that grew, with the support of the Clinton administration, through the 1990s, becoming a major opponent of government oversight even as it was benefiting from public subsidies. They expose the role played not only by Fannie Mae executives but also by enablers at Countrywide Financial, Goldman Sachs, the Federal Reserve, HUD, Congress, the FDIC, and the biggest players on Wall Street, to show how greed, aggression, and fear led countless officials to ignore warning signs of an imminent disaster. Character-rich and definitive in its analysis, this is the one account of the financial crisis you must read"--… (more)

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