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

The novelist William Faulkner once said: "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: diversity.

Although 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 another $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 reporters had scratched their head in amazement over how

"unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P. 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."

[Advocates 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?

These 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 ethno-activists, politicians, and money men teamed up for mutual profit ever since the notoriously misleading Boston Fed report of 1992 that alleged pervasive discrimination by mortgage lenders.

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

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 Main Street wing that was suspicious of Wall Street.

You can still see a lot of this attitude in Tea Party 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 Who? Whom? 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 government 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 private / 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 Companion-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 Endangerment: "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 job? 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 Endangerment: "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 "Friends of Angelo [Mozilo]" 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 "velvet fist" of Fannie Mae made sure that the GSE's hard-to-defend privileges were not imperiled by Congress or their hapless nominal regulator, 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 possibilities because the Friends of Angelo loans became public): this Norwegian-American 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 both.

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 reassuring-sounding "Federal Housing Enterprises Financial Safety and Soundness Act". Reckless Endangerment:

"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 (Working 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 [Alicia] Munnell, who revealed yet another problem with the analysis. Munnell told Forbes 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."[VDARE.com note: See The Hidden Clue, By Peter Brimelow and Leslie Spencer, Forbes, 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.

"Munnell 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.'"

 (For Peter Brimelow's rueful retrospective on the total indifference with which this devastating refutation was greeted, see here. By an amazing coincidence, Richard F. Syron, who as CEO of Freddie Mac was my 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."

(Syron "earned" $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 Rosner:

"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 jettisoned."

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

"'Affordable housing 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 New 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 VDARE.com, 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:

"How did Fannie Mae and Freddie Mac … turn into the world's biggest funders of Wall Street-backed subprime mortgages? … It all started with the best 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 Mozilo.

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 foes."

Morgenson 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 run—or even in the short run.

The "diversity" 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 themselves.

Was this predatory lending? Sure!

But, remember, it was also predatory borrowing, predatory brokering, predatory securitizing, and so forth.

In general, Morgenson and Rosner's perspective is quite similar to the one I've been offering since 2007-2008. (Neither I nor VDARE.com are cited).

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.

Like 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. Bush's 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.

That turning point has disappeared down the memory hole—Reckless Endangerment 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 for The American Conservative. His website www.iSteve.blogspot.com features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]