Reckless Endangerment: The Housing Bubble

[henryclay]

The housing bubble, how it was engineered, who nursed it, who ran political interference for it, who was enriched by it, and the bailout that followed.

Here is one review. There is another review on Huffington Post. It names financial institutions but does not name the Washington facilitators, and takes pointed exception to the book's revelations.

Washington and Wall Street: The Revolving Door
By ROBERT B. REICH
RECKLESS ENDANGERMENT

By Gretchen Morgenson and Joshua Rosner

Illustrated. 331 pp. Times Books/Henry Holt & Company.
It’s hardly news that the near meltdown of America’s financial system enriched a few at the expense of the rest of us. Who’s responsible? The recent report of the Financial Crisis Inquiry Commission blamed all the usual suspects — Wall Street banks, financial regulators, the mortgage giants Fannie Mae and Freddie Mac, and subprime lenders — which is tantamount to blaming no one. “Reckless Endangerment” concentrates on particular individuals who played key roles.

The authors, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, an expert on housing finance, deftly trace the beginnings of the collapse to the mid-1990s, when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The mortgage agencies’ government backing was, in effect, a valuable subsidy, which was used by Fannie’s C.E.O., James A. Johnson, to increase home ownership while enriching himself and other executives. A 1996 study by the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. Over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated no less lavishly.

To entrench Fannie’s privileged position, Morgenson and Rosner write, Johnson and Raines channeled some of the profits to members of Congress — contributing to campaigns and handing out patronage positions to relatives and former staff members. Fannie paid academics to do research showing the benefits of its activities and playing down the risks, and shrewdly organized bankers, real estate brokers and housing advocacy groups to lobby on its behalf. Essentially, taxpayers were unknowingly handing Fannie billions of dollars a year to finance a campaign of self-promotion and self-­protection. Morgenson and Rosner offer telling details, as when they describe how Lawrence Summers, then a deputy Treasury secretary, buried a department report recommending that Fannie and Freddie be privatized. A few years later, according to Morgenson and Rosner, Fannie hired Kenneth Starr, the former solicitor general and Whitewater investigator, who intimidated a member of Congress who had the temerity to ask how much the company was paying its top executives.

All this gave Fannie’s executives free rein to underwrite far more loans, further enriching themselves and their shareholders, but at increasing risk to taxpayers as lending standards declined. A company called Countrywide Financial became Fannie’s single largest provider of home loans and the nation’s largest mortgage lender. Countrywide abandoned standards altogether, even doctoring loans to make applicants look creditworthy, while generating a fortune for its co-founder, Angelo R. Mozilo. Meanwhile, Wall Street banks received fat fees underwriting securities issued by Fannie and Freddie, and even more money providing lenders like Countrywide with lines of credit to expand their risky lending and then bundling the mortgages into securities they peddled to their clients. The Street, Morgenson and Rosner say, knew lending standards were declining but maintained the charade because it was so profitable. Goldman Sachs even used its own money to bet against the bundles — making huge profits off the losses of its clients on the very securities it had marketed to them. Eventually, of course, everything came crashing down.

The authors are at their best demonstrating how the revolving door between Wall Street and Washington facilitated the charade. As Treasury secretary, Robert Rubin, formerly the head of Goldman Sachs, pushed for repeal of the ­Depression-era Glass-Steagall Act that had separated commercial from investment banking — a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with ­Citibank. After leaving the Treasury, Rubin became Citigroup’s vice chairman, and “over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design.” With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank reduced its oversight of Wall Street.

A tight web of personal relationships connected Fannie, Goldman Sachs, Citigroup, the New York Fed, the Federal Reserve and the Treasury. In 1996, Fannie added Stephen Friedman, the former chairman of Goldman Sachs, to its board. In 1999, Johnson joined Goldman’s board. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when the firm created many of its most disastrous securities — while Geithner’s New York Fed looked the other way. As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout.

Morgenson and Rosner are irked that their key players got away with it. American taxpayers have so far shelled out $153 billion to keep Fannie and Freddie afloat and are still owed tens of billions from bailing out other financial institutions. Yet today James Johnson is a rich and respected member of Washington’s political establishment (although he was forced to resign from President-elect Obama’s advisory team after the press got wind of his cut-rate personal loans from Countrywide). Franklin Raines retired from Fannie with a generous bonus. Henry Paulson became a fellow at Johns Hopkins. Robert Rubin is affiliated with the Brookings Institution. Timothy Geithner remains Treasury secretary.

“The failure to hold central figures accountable for their actions sets a dangerous precedent,” the authors say. “A system where perpetrators of such a crime are allowed to slip quietly from the scene is just plain wrong.” True up to a point — but Morgenson and Rosner don’t show that any actual crimes were committed. Their major characters surely exhibited outsize ambition and greed, but these qualities are not exactly rare in modern capitalism. Curiously absent from their book are some other prominent people who have been suspected of perpetrating fraud, like Richard S. Fuld Jr., who ran Lehman Brothers into the ground, and Joseph J. Cassano, the former head of the financial products unit at A.I.G.

The real problem, which the authors only hint at, is that Washington and the financial sector have become so tightly intertwined that public accountability has all but vanished. The revolving door described in “Reckless Endangerment” is but one symptom. The extraordinary wealth of America’s financial class also elicits boundless cooperation from politicians who depend on it for campaign contributions and from a fawning business press, as well as a stream of honors from universities, prestigious charities and think tanks eager to reward their generosity. In this symbiotic world, conflicts of interest are easily hidden, appearances of conflicts taken for granted and abuses of public trust for personal gain readily dismissed.

All told, the nation appears to have learned remarkably little from the near meltdown. Fannie and Freddie, now wards of the state, currently back more than half of all new mortgages, and their executives are still pocketing fortunes. Wall Street’s biggest banks are a fifth larger than they were when they got into trouble, and the pay packages of their top guns as generous. Although the rest of America has paid dearly, we seem more recklessly endangered than ever.

[AgeOfEnlightenmentSCP]

This is the book that has been called a Weapon of Mass Destruction for Republicans to use against Democrats if they're savvy enough to use it. It's a stinging indictment of the REAL culprits in the housing mess-- Democrats like Barney Frank, Chris Dodd, Kent Conrad, and a slew of other Democrats and leftist cronies at Fannie and Freddie.

[maui1]

in the 90s and early 2000s, i can remember many hearing requests for fannie and freddy, as many on the hill knew what was coming, but with barney and chris overseeing every banking committee on the hill, and their strong support for fannie and freddy, nothing ever happened to fix the problem.

then came 2008 and barney and chris took the lead in calling out wall street, as a miss-direction ploy, as to not be held accountable for what they did to start the housing bubble.

funny part is......they were successful in their 'mis-direct', as there were tasked with writing the rules for stopping our next financial bubble from happening.

this whole process.....reminds me of when i was bad in school, and the teacher made me write on the chock board, over and over again....."i will not cause a housing bubble........i will not cause a housing bubble", in the hopes that i learn from my mistake and never ever do what did in the past, again.

do you think, the people on the hill learned their lesson, of do they need more 'chock board' time?

[maui1]

: April 10, 2000

Fannie Mae and Freddie Mac Circle the Wagons
The home-loan financers' ties to the government are under siege

Fannie Mae and Freddie Mac Circle the Wagons

TABLE: What Has Critics Riled

Franklin D. Raines, chairman of mortgage giant Fannie Mae, always figured he knew who his enemies were. For years, critics of government subsidies, housing activists, and the big banks and mortgage insurers that are his major competitors have been trying to trim Fannie's sails. Recently, with the backing of key Republican lawmakers, they have been stepping up their attacks. But now, even some of Raines's best friends are criticizing Fannie Mae, as well as its smaller cousin, Freddie Mac--the two government-chartered companies that help finance about 40% of all home mortgages in America.

Within just a few weeks, two top Clinton Administration officials fired shots across Fannie's bow. On Mar. 1, Housing & Urban Development Secretary Andrew M. Cuomo charged that Fannie and Freddie do too little to help low-income home buyers. Then, in a far more ominous move, on Mar. 23, Treasury Under Secretary Gary Gensler struck at the heart of the companies' special relationship with the federal government. Gensler endorsed legislation that would strip away key subsidies, such as their right to borrow directly from the Treasury. And he reminded investors that Fannie and Freddie bonds carry no explicit government guarantee. The response: The bonds cratered in the markets, costing Freddie, which was in the midst of selling $5 billion in bonds, about $65 million over the 10-year life of the issue.

The attacks were bad news for Raines, himself a former director of President Clinton's Office of Management & Budget and a regular on lists of possible running mates for Al Gore. While Treasury toned down Gensler's remarks within a day--insisting that he was simply restating longstanding policy--critics are gleeful. "They've put the guarantee in play," says one bank lobbyist.

Why the criticism? Fannie and Freddie were originally chartered by Congress three decades ago to make mortgages cheaper and more accessible. They purchase home loans from mortgage lenders, package them, and resell them on Wall Street. They are called Government-Sponsored Enterprises, but are in fact investor-owned companies whose shares trade publicly.

Banks have long argued that the implied guarantee unfairly cuts Fannie's and Freddie's borrowing costs. That keeps most banks out and allows the two companies to dominate the mortgage-resale business. But the banks' real fear is that the companies will start to make their own direct loans.

Fannie and Freddie deny plans to do that, but they clearly enjoy special status. The companies benefit from a $2.25 billion line of credit with the Treasury. Banks also may hold an unlimited amount of their bonds, in contrast with sharp limits on investing in other nongovernment securities. The companies can also issue debt without registering with the Securities & Exchange Commission. "All of these things make a powerful implicit argument that the government would support the holders of these securities," says Standard & Poor's Corp. Managing Director Michael T. DeStefano.

Those benefits add up to a AAA rating and sharply reduced borrowing costs: This year, on average, 10-year Fannie debt has traded at a bare 0.72 percentage points above similar Treasury bonds. In contrast, AAA-rated bonds are about 1.10 percentage points more expensive than Treasuries. When Gensler pointed out that an explicit government guarantee does not exist, the difference between Fannie and Treasury debt widened sharply if briefly.

Why did Gensler go on the offensive? Treasury officials don't want bond investors to price the debt as though a federal guarantee is assumed; that would mean a government bailout in a market crisis is also assumed. They are especially worried because Fannie and Freddie could become the country's biggest issuers of bonds--and replace Treasuries as the credit markets' benchmark. Today, the companies have nearly $1.5 trillion in outstanding bonds, while the Treasury is paying down the $2.7 trillion national debt.

Becoming the benchmark would link most of the nation's interest rates to the fortunes of just two companies. And it would make it impossible for any future Administration to let Fannie or Freddie default. "It would make them immortal," says Peter J. Wallison, a former Treasury general counsel.

Raines argues that Fannie's advantages "do reduce our costs--and the costs for consumers." Until now, that argument has made the companies bulletproof in the Washington wars.

But fears are growing that Fannie and Freddie are getting too powerful. That's why a group of banks, mortgage insurers, and subprime lenders are massing to block the companies from expanding their businesses. They even hope to strip Fannie and Freddie of some of their lucrative benefits. To help, they have scored some heavy political muscle, including former Republican National Committee Chairman Haley R. Barbour and Tony Podesta, brother of White House Chief of Staff John Podesta. And they are making progress. In February, a key House subcommittee chairman, Representative Richard H. Baker (R-La.), introduced legislation to curb many of the companies' benefits.

Fannie and Freddie aren't taking the assault sitting down. Fannie's top ranks are filled with well-connected pols, from Raines to John Buckley, spokesman for Bob Dole's Presidential campaign. Fannie also spent an estimated $6 million on outside lobbying last year.

They'll need the muscle. The bigger they grow, the bigger a target they'll be. While critics know they can't score many points against the companies in an election year, they insist that Congress will eventually mandate a level playing field. Perhaps--but not without a battle.

By Howard Gleckman in Washington
Portfolio Service Update

What Has Critics Riled
The benefits of being Fannie and Freddie
IMPLIED U.S. GUARANTEE
Fannie and Freddie debt carries an implicit guarantee, but is not government-backed.
GOVERNMENT SUBSIDIES
The two can borrow from the Treasury, pay no state income taxes, and are free from SEC registration.

[ungenteel]

stop with the Fannie a Freddie ... the real culprit was Gramm–Leach–Bliley Act

[AgeOfEnlightenmentSCP]

www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal/

Countrywide's Many 'Friends'

by Daniel Golden Jun 12 2008

Senators Dodd and Conrad are among the government officials who scored V.I.P. loans from C.E.O. Angelo Mozilo. An exclusive Portfolio investigation.

Two U.S. senators, two former Cabinet members, and a former ambassador to the United Nations received loans from Countrywide Financial through a little-known program that waived points, lender fees, and company borrowing rules for prominent people.

Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans.

Other participants in the V.I.P. program included former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke. Jackson was deputy H.U.D. secretary in the Bush administration when he received the loans in 2003. Shalala, who received two loans in 2002, had by then left the Clinton administration for her current position as president of the University of Miami. She is scheduled to receive a Presidential Medal of Freedom on June 19.

Holbrooke, whose stint as U.N. ambassador ended in 2001, was also working in the private sector when he and his family received V.I.P. loans. He was an adviser to Hillary Clinton’s presidential campaign.

James Johnson, who had been advising presidential candidate Barack Obama on the selection of a running mate, resigned from the Obama campaign Wednesday after the Wall Street Journal reported that he received Countrywide loans at below-market rates.

Most of the officials belonged to a group of V.I.P. loan recipients known in company documents and emails as “F.O.A.'s”—Friends of Angelo, a reference to Countrywide chief executive Angelo Mozilo. While the V.I.P. program also serviced friends and contacts of other Countrywide executives, the F.O.A.’s made up the biggest subset.

According to company documents and emails, the V.I.P.'s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.'s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.'s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.

Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the “Friends of Angelo” discount, and that Mozilo had personally priced their loans.

The V.I.P. loans to public officials in a position to advance Countrywide’s interests raise legal and ethical questions. Countrywide’s ethics code bars directors, officers and employees from “improperly influencing the decisions of government employees or contractors by offering or promising to give money, gifts, loans, rewards, favors, or anything else of value.” Federal employees are prohibited from receiving gifts offered because of their official position, including loans on terms not generally available to the public. Senate rules prohibit members from knowingly receiving gifts worth $100 or more in a calendar year from private entities that, like Countrywide, employ a registered lobbyist.

[AgeOfEnlightenmentSCP]

www.washingtonpost.com/wp-dyn/content/article/2006/12/16/AR2006121600729.html

Obama Says He Regrets Land Deal With Fundraiser

By Peter Slevin
Washington Post Staff Writer
Sunday, December 17, 2006

CHICAGO. Dec. 16 -- Antoin "Tony" Rezko is a political insider, an energetic Chicago dealmaker and campaign fundraiser often in the headlines for being on the wrong side of good government. Indicted in October on influence-peddling charges, he also has a habit of befriending prospective political stars.

One of them was Sen. Barack Obama (D-Ill.), who was offered a job by Rezko in the early 1990s while a top student at Harvard Law School. Obama did not take it, but over the years, the two men stayed in touch, and Rezko backed Obama's successful 2004 U.S. Senate campaign, raising money and contributing his own.

In June 2005, in what Obama now describes as a "boneheaded" mistake, Obama and Rezko's wife bought adjacent properties on Chicago's South Side, closing the deals on the same day. Seven months later, wanting a bigger yard for his $1.65 million house, Obama bought a slice of the Rezko property for $104,500.

After news of the deal broke last month in the Chicago Tribune, Obama said he had erred by creating the appearance that Rezko had done him a favor by selling him a portion of the lot. For the first time since he entered the national spotlight, the 45-year-old freshman senator found himself on the defensive, discussing a personal decision he had come to regret.

"There's no doubt that this was a mistake on my part. 'Boneheaded' would be accurate," Obama said in a telephone interview Friday. "There's no doubt I should have seen some red flags in terms of me purchasing a piece of property from him."

Obama recently donated to charity $11,500 that Rezko had contributed to his federal campaign account.

There have been no allegations that Obama, whose political fortunes are soaring as he mulls a run for president, broke the law or committed any ethics violations. He said he has done no government business with Rezko, who is facing charges in two unrelated criminal cases.

But leaders of Chicago watchdog organizations describe Obama's behavior as a surprising error in judgment, particularly for a politician noted for his tactical skills, his ambition and his support of state and federal ethics legislation.

"It's disappointing because there has been speculation about Tony Rezko, and whether he was crossing ethical lines, for a number of years," said Cynthia Canary, director of the Illinois Campaign for Political Reform.

Jay Stewart, executive director of Chicago's Better Government Association, said, "Being a lawyer, he did everything by the book, but there's a higher expectation of him."

[AgeOfEnlightenmentSCP]

Let's not forget that Obama tapped Rezko to head his Senate election efforts-- and that his White House advisor, and notorious Chicago slumlord, Valerie Jarrett-- a close friend to the Obamas for years, and someone with whom Obama is said to "share a brain" with...has done over 100 deals with Rezko-- the most notorious of which was Grove Park.

See, you can choose to be informed- or you can read the NY Times and listen to the Democratic Party line.