Morgenson And Rosner`s Reckless Endangerment: On Trail Of Minority Mortgage Meltdown—But Where`s Dubya?

The novelist
William Faulkner
: “The past
is not dead. In fact, it`s not even past.”

I was reminded of that last week
while reading what is likely the best narrative history so
far of the causes of the current recession: Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by
Gretchen Morgenson and Joshua Rosner.

The book focuses upon the
Washington-Wall Street-southern California connections that
corrupted the mortgage business`s traditional credit
standards. It recounts the excuses bandied about by these
crony capitalists to justify their self-enrichment. Of
particular interest is
Reckless Endangerment`s
documentation of the role played
by that most sacred of contemporary rationalizations for the
pursuit of power and money:


Reckless Endangerment
concentrates upon events from 1991 through 2008, this
story is far from over and done with. Last Friday, June 3,
2011, the Congressional Budget Office estimated that the
taxpayers will have to shell out

$42 billion
in the bailouts of Fannie Mae and
Freddie Mac, the quasi-governmental

mortgage market giants
whose role in the meltdown is the
chief focus of
Reckless Endangerment

Moreover, the role played by
diversity in the

Minority Mortgage Meltdown
and the ensuing

Diversity Recession
is still just not understood in the
conventional wisdom. Thus, earlier in the week, two
New York Times

had scratched their head in amazement
over how

“unusual alliances have sprung up in opposition to tighter
lending standards. Advocacy groups like the

and the National Council of La Raza, a Latino
civil rights organization, on the one hand, and the American
Bankers Association on the other, are joining together to
fight rules they say could make home loans less affordable
for minority and working-class Americans.”

and Bankers Join to Fight Loan Rules
by Edward Wyatt
and Ben Protess, June 1, 2011]

Hmmm. Who could imagine Wall Street
and Mean Street ever teaming up to fleece Main Street?

NYT reporters
would have been less amazed if they had read this new book
co-authored by their own
assistant editor Morgenson.
Reckless Endangerment
documents how often

politicians, and money men teamed up
for mutual profit ever since the

misleading Boston Fed report of 1992 that
alleged pervasive discrimination by mortgage lenders.

won a Pulitzer Prize in 2002 for her coverage
of Wall Street for the
. She had previously been a reporter at
Forbes, where she
did so well that her colleague,
Peter Brimelow,
now Editor of, made a

that she would be
Forbes` editor one
day. (This didn`t happen, and
Forbes appears on
the edge of extinction).

Morgenson brings a political
perspective that has been out of fashion for years. I have
no idea what her partisan registration is, but, judging from
Reckless Endangerment,
I would describe her as an old-fashioned Green Eyeshade

Back in Dwight Eisenhower`s day, the
GOP took pride in being the

Sharp Pencil Party
, the natural home for people with

suspicious squints
who like to add up all the numbers
twice to make sure nobody is pulling a fast one with other
people`s money. The GOP had a self-confident
wing that was suspicious of Wall Street.

You can still see a lot of this
attitude in
folks. Unfortunately, Americans don`t really have
a vocabulary anymore for expressing the concept of being
against anybody pulling fast ones.

Over time, political thinking in
America has simply deteriorated into partisan ideologies
based on
Instead of being against chicanery, we`re
supposed to be against chicanery by the other side`s guys.
Democrats are now supposed to assume that government can`t
be corrupt because it`s

and therefore, by definition, good.
Republicans are supposed to assume that for-profit companies
can`t be corrupt because they are policed by the

magic of the market.

Morgenson, who is for both honest,
effective business and
for honest, effective regulation, cleverly gets around these
contemporary prejudices by making her history`s arch-villain
the Crony Capitalist-in-Chief,

James A. Johnson.
Johnson, chairman during the crucial
years 1991-1998 of that disastrous
/ public hybrid Fannie Mae,
was the man who, more than
anybody else, set the

mortgage meltdown
in motion.

Is Johnson a businessman, a
politician, or a public servant? None of the above, really.
He was the ultimate Washington insider.

Johnson is a seemingly bland figure,
harder to notice than his colorful allies in the degradation
of credit norms—like Congressman

Barney Frank,
1990s Secretary of Housing

Henry Cisneros,
or Countrywide president

Angelo Mozilo
. The son of a Minnesota politician,
Johnson is a
Prairie Home
-type who was Vice President Walter
Mondale`s chief aide and 1984 campaign manager.

Johnson was appointed CEO of Fannie
Mae in 1991 because he could pull strings in Washington to
protect Fannie`s lucrative privileges. While Fannie Mae had
previously been seen as something of a sleepy public
utility, Johnson envisioned it as a money machine. He
realized that the implicit backing of the U.S. Treasury to
bail out this government
sponsored enterprise
(a government-established but
publicly traded for-profit company) meant billions per year
in lower capital costs. Some of this vast sum could be
passed on to homebuyers in lower interest rates, but another
fraction could be passed on to Fannie Mae`s stockholders.

And if a few crumbs wound up in Jim
Johnson`s pocket (Reckless
“Indeed, over his nine years at the company, he took out

roughly $100 million in pay
), well, he knew how to
forestall complaints in modern Washington.

To protect that kind of
political-financial power, you have to spend money to make
money. But when you have as much money as Fannie Mae, it`s
remarkable how relatively little it takes to turn potential
critics into supporters. By diverting relatively trifling
sums, Johnson made lots of power brokers very happy with
Fannie over the years.

Does Congressman Barney Frank`s
boyfriend Herb Moses need a

? Put him in charge of
“relaxing Fannie
Mae`s restrictions on home improvement loans”
(e.g., for

gay gentrifiers

Does the Congressional Hispanic
Caucus need a donation?

How does a million bucks sound?

Do housing economists need academic
journals in which to publish so they won`t perish? Create
two journals and give stipends to

friendly economists.

Is ACORN protesting in the streets?

Give them a grant
! Bring them, and

dozens of other racial racketeers,
inside the tent.
There`s plenty of money for everybody.

Have you hired all the
best-connected lobbyists in Washington, but are worried that
your rivals will hire the second-best? Money can fix that,
too. Reckless
“The company even paid lobbyists to agree not to lobby
against it”

Is Steve Forbes running in the 1996
New Hampshire Republican Presidential primary against the
tax deductibility of mortgage interest? (Morgenson had been
hired by Forbes to be his press secretary for the campaign—a
Peter Brimelow prediction that actually came off.) Well,
Fannie can fix that by

running ads in the
Manchester Union-Leader
against him.

Do politicians, such as Senators

Chris Dodd
(D-CN) and Barbara Boxer (D-CA), want a
mortgage at below market rates? The notorious
of Angelo
loans from

Countrywide Financial
were usually Friends of Fannie,
too. Reckless Endangerment:

“That many of these recipients were friends of Jim Johnson
was no coincidence. Indeed, he often acted as a kind of
super-powered mortgage middleman; upon hearing of a friend`s
home-loan needs, he would call Mozilo on his private line
and provide the particulars.”

Johnson never forgot a friend or
forgave an enemy. The
of Fannie Mae made sure that the GSE`s
hard-to-defend privileges were not imperiled by Congress or
their hapless nominal

, the intimidated Office of Federal Housing
Enterprise Oversight.

Fannie Mae was hardly the only
culpable party, though. Morgenson and Rosner observe:

“Of all the partners in the homeownership push, no industry
contributed more to the corruption of the lending process
than Wall Street.”

When Johnson retired from Fannie Mae
in 1998, he went on the board of directors of investment
bank Goldman Sachs. Hank Paulson, Goldman`s CEO (and

future Treasury Secretary under George W. Bush
), liked
his style so much when it came to his own salary that he
made Johnson head of the Goldman board`s compensation
committee, which set Paulson`s pay.

One hand washes the other.

Washington corruption is as old as
the city, but Johnson`s peculiar genius was that he made it
hugely respectable. Johnson used Fannie`s lucre so adroitly
that by 1997 he was chairman not only of Fannie, but also of
two other Washington institutions of great prestige: the
Kennedy Center for the Performing Arts and the

Brookings Institution
liberal think tank.

One key to Johnson getting away with
all this for so long (he never suffered a reversal until the
summer of 2008, when he had to

resign his post vetting Barack Obama`s Vice President
because the

Friends of Angelo loans
became public): this

repeatedly and shamelessly played the
Race Card.

Did Johnson loudly hop on the
diversity bandwagon for lowering credit standards to protect
Fannie`s perquisites or to grow his portfolio? Probably

When he took over Fannie Mae in
1991, Johnson made a $10 billion commitment to lower-income
borrowers. Morgenson and Rosner report:
“The idea, according
to former employees, was to finance so much low-income
housing that Fannie Mae`s government perquisites could never
be taken away.”

In 1992, the Democratic majority in
Congressed passed (and George H.W. Bush signed) the
“Federal Housing Enterprises Financial Safety and Soundness
. Reckless

“But the law had another key element that would, more than
any other single act, lead to the disastrous home lending
practices of the 2000s … While historically Fannie and
Freddie supported housing by buying safe mortgages when
other sources of capital for borrowers dried up, now the
companies` focus on soundness was diluted by the requirement
that they serve the housing needs of `low-income and
underserved families.`”

Johnson invited

Fannie`s new ally ACORN
to help advise the Democrats to
set quotas of 30 percent for inner cities.

Then, in October 1992, the Boston
Fed released a report that, in

Reckless Endangerment`s

summary, “showed that black
and Hispanic loan applicants were far more likely to be
rejected by banks than were whites”
. [Mortgage
lending in Boston: Interpreting HMDA data
Paper 92-7

This finding of

disparate impact
was rapturously received. But, as
Morgenson and Rosner note:

"Forbes magazine was among the few media outlets to question the
study`s findings. For an article published on January 3,
1993, staffers Peter Brimelow and Leslie Spencer interviewed
who revealed yet another problem with the
analysis. Munnell told
that in preparing the study, Fed researchers
looked at default rates across census tracts and found that
minorities do not tend to fail more often on their loans
than whites.

“What we
found was, there was no relationship between the racial
composition of the tract and the default rate,” Munnell told
Forbes. “So it
wasn`t true that tracts with large minority populations had
higher default rates.”[

See The Hidden
, By Peter Brimelow and Leslie Spence

January 4, 1993

“Such a
finding should have been a signal to the researchers that
their discrimination findings were off base,
Forbes contended.
After all, if bias were at work in minority neighborhoods,
default rates in those areas would have been lower than
among white areas, indicating that bankers were refusing
loans to legitimate minority borrowers.

agreed that discrimination against blacks should show up in
lower, not equal, default rates. `You need that as a
confirming piece of evidence,` Munnell told the
Forbes reporters.
`And we don`t have it.`”

Peter Brimelow`s rueful retrospective on the total
indifference with which this devastating refutation was
greeted, see
By an amazing coincidence, Richard F. Syron, who as CEO of
Freddie Mac was
own Johnson-type candidate
for architect of the
disaster, was at the time president of the Boston Fed, where
he hailed the study with the arrogant announcement:
"Comports with common sense, no
more studies needed."

$38 million in 5 years at Freddie Mac.

In 2004 he rejected a memo from Freddie`s chief risk
officer, David Andrukonis,
saying that Freddie`s
increasingly shoddy underwriting standards were threatening
to destroy the firm. But I now think that Morgenson and
Rosner make a fairly good case that Johnson was the more
central, more historic figure.)

Black politicians, needless to say,
began to complain that Fannie was abetting bank
discrimination by buying racist mortgages. Morgenson and

“James Johnson saw the opportunity for Fannie Mae in this
potential problem: Lending to minorities could help his
company`s expansion effort as well as its image. He was soon
fanning the flames lit by the Fed`s report. `We see evidence
that there are a significant number of prospective home
buyers in this country whose only barrier to achieving their
dream of home ownership is not their economic status, but
their racial status …`”

Johnson gave ACORN and La Raza
grants and had them join with bankers and realtors on an
advisory council:

“Fannie Mae offered to begin buying new types of mortgages
to expand its affordable housing reach. This allowed the
company to grow its operations, and its earnings, while
positioning itself as a do-gooder. … These

[credit] standards
had for decades acted as a kind of governor on lax lending
among banks interested in selling loans to Fannie. But amid
cries of racial discrimination, risk-averse practices were

As Morgenson and Rosner write,
“down-payment requirements were the first to go”, from the
traditional 20 percent to
“5 percent or less”:

was the price they would have to pay keep their
benefits,` recalled one industry official who was on hand
during the legislative process.”

In lending, there had traditionally
been a hierarchy of respectability based on the
trustworthiness of borrowers. At the bottom were loan
sharks, pawnbrokers,

payday firms
, subprime lenders and other dubious
operators. At the top, Fannie Mae was considered staid but
eminently respectable because, ever since its creation by
the Roosevelt Administration in 1938, it had aimed at
serving the average American homebuyer. (In passing, it`s
worth noting that
Deal reforms
worked better than subsequent liberal
innovations because they were primarily aimed at helping
average Americans—not at subsidizing minorities.)

Under Johnson, however, Fannie began
using its prestige to encourage risks. Morgenson and Rosner:

“Because Fannie was the leader in housing finance, its
actions set the tone for private-sector lenders across the
nation. `They were omnivores,` the former executive said.
`The further they moved out on the risk curve, the more they
pushed the market to follow.`”

What Morgenson and Rosner are
reporting isn`t wholly a new story. Nearly

two years ago on
, I reviewed
Alyssa Katz`s
insightful (but sadly overlooked) book
Our Lot
recounting this same 1990s history, but from a more liberal
point of view. Looking back from 2009, Katz asked:

did Fannie Mae and Freddie Mac … turn into the world`s
biggest funders of Wall Street-backed subprime mortgages? …
It all started with the 
of intentions
, with … the activists who demanded bank
loans for the poor and urban.”

To Jim
Johnson, his campaign to lend one trillion dollars to ten
million incremental homeowners was “nothing less than a
civil rights crusade”

Especially disastrous was the
symbiotic relationship Johnson cultivated with Countrywide`s

In 1995, Mozilo agreed with HUD
secretary Henry Cisneros to make Community Reinvestment
Act-like pledges to lend to minority communities. Mozilo
became the leading private sector enthusiast for the Clinton
Administration`s National Homeownership Initiative. In 1998,
Morgenson and Rosner report,

“Jim Johnson had agreed to charge Mozilo`s company far lower
guarantee fees than its rivals on mortgages Fannie Mae
bought from the company and sold to investors. … Countrywide
soon became the single biggest seller of loans to Fannie
Mae. … Countrywide supplied 26 percent of the loans
purchased by Fannie in 2004 …”

Morgenson and Rosner argue: “More than any other mortgage lender, Countrywide was at heart
a Fannie Mae clone”

“Mozilo`s friendship with Johnson had given him a front-row
seat for the Fannie Mae way—the deep political focus, the
co-opting of regulators, the manipulation of public opinion,
and extensive granting of favors to friends and potential

deserve credit for repeatedly emphasizing the role that
racial politics played in justifying the credit debacle. In
contrast, we saw a couple of weeks ago that

Peter Wallison`s dissent
to the financial crash report
to Congress avoided mentioning the M-word (“minority”),
merely saying the quotas were aimed at “lower income”
borrowers. To their credit, Morgenson and Rosner use far
fewer PC euphemisms.

They also
make clear that, while the system of mortgage backscratching
perfected by Johnson was very good for racial organizers
like ACORN and La Raza, it

wasn`t good for the average black or Hispanic in the long
—or even in the short run.

rationale empowered boiler room operators
like Countrywide to

target, in the name of closing the racial gap
innumerate blacks and Hispanics with

exploitative subprime loans.
One former Countrywide
broker told Morgenson that Countrywide barely broke even on
loans in Santa Monica, a high IQ white community

home to screenwriters and Hollywood agents
. In contrast,
at Countrywide`s Slauson office—in the `hood under the LAX
flight path—brokers were expected to pile on points in the
fine print because the borrowers seldom crunched the numbers

Was this
predatory lending? Sure!

remember, it was also

predatory borrowing

predatory brokering
, predatory

, and so forth.

general, Morgenson and Rosner`s perspective is quite similar
to the one I`ve been

since 2007-2008. (Neither I nor are

But this
brings me to a criticism of Reckless Endangerment.
In Johnson`s defense, he was a more prudent crony capitalist
than those who came after him in the Bush II years. Johnson
maintained a certain level of cynicism that kept him from,
say, pushing hard for ridiculous excesses such as zero
down-payment mortgages.

Katz`s 2009 book,
Reckless Endangerment
focuses upon how Democrats like
Johnson had slowly undermined the system in the 1990s.

But the
Housing Bubble didn`t get supersized until after George W.
October 15, 2002
“White House Conference on
Increasing Minority Homeownership”
. There, the
Republican President recklessly

denounced down-payments
as the foremost hurdle to
closing the racial gap in homeownership.

turning point has disappeared down the memory hole—Reckless
doesn`t mention it—perhaps because it
doesn`t fit anybody`s narrative.

But, as
I`ve pointed out repeatedly, it was the Democrats in the
1990s who loaded the gun, but, more than anybody else, it
was George II who pulled the trigger.

So we`re
still waiting for the book that will give us the inside
story on the Bush Bust—the Republicans` catastrophic
2000s—and its contribution to the Crash of 2008.

[Steve Sailer (email
him) is

movie critic

The American Conservative

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