Explaining the American Nightmare – By George J. Marlin

 The following appears in the August 12-18, 2011 issue of the Long Island Business News:

People interested in a good summer nonfiction read should pick up a copy of the bestseller, “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon,” by Gretchen Morgenson and Joshua Rosner.

Morgenson, a Pulitzer Prize-winning New York Times business news reporter, and Rosner, an expert housing and mortgage research analyst, have penned a fascinating no-holds-barred story about those responsible for the mortgage meltdown that caused the greatest economic downturn in America since the Great Depression.

The seeds of destruction were planted by Bill Clinton in 1994, when he announced that the U.S. government was determined to “expand the American Dream” by increasing the number of homeowners across America.

To implement his policy, Clinton turned to Fannie Mae, a New Deal creation that has supported the housing market by purchasing mortgages.

Fannie Mae, which was privatized in the 1960s and since 1981 has issued and guaranteed mortgage-backed securities, maintained the false image that it was still a government-backed organization because it was exempt from disclosing financial data and executive salaries, from paying taxes in the District of Columbia and some board members were appointed by the president.

Fannie Mae, “Reckless Endangerment” documents, “led the way in relaxing loan underwriting standards.” Down payments of 20 percent and income verification were eliminated. Lending institutions were told to approve mortgages in a more “democratic” fashion and to expand creative financing and to simplify the home-buying process.

The authors persuasively argue that James A. Johnson, CEO of Fannie Mae (1991-1998), “not only opened the door to the mortgage meltdown [but] virtually guaranteed it.” A master at public relations, political lobbying and fundraising, he manipulated Congress to eliminate government oversight of Fannie Mae even though it accepted government subsidies.

The Federal Safety and Soundness Act of 1992, which had Johnson’s fingerprints all over it, actually encouraged unsafe and unsound Fannie Mae activities, permitted it to design its own regulations, eliminated oversight and accountability and required it to meet the needs of “low income and underserved families.” The 1992 act set the stage for Fannie Mae to buy from lending institutions around the nation risky loans that were likely to default.

Rep. Barney Frank of Massachusetts, a prime enabler of the legislation, when asked if he was concerned that many people who received subprime loans would face financial ruin, smugly replied, “We’ll deal with that problem if it happens.”

Well, it did happen and in a nutshell here’s how: After buying tens of billions of subprime mortgages from banks and mortgage lending institutions, Fannie Mae bundled them and sold them to investment banking firms (e.g., Goldman Sachs) who procured insurance guarantees and AAA ratings from Moody’s and Standard & Poor’s. The investment bankers then sold these toxic securities to unsuspecting individuals, mutual funds and bank investment portfolios. Unloading these subprime mortgages to various investors was merely a reshuffling of the chairs on the deck of the Titanic.

When the real estate bubble burst and the housing market collapsed many financial institutions – like Long Island’s now defunct American Home Mortgage Investment Corp. – and insurance companies on the hook, bellied up and threatened to take down the entire financial system.

Millions of ordinary people could only stand by helplessly as the equity in their homes and the assets in their 401(k) retirement plans were wiped out. And to add insult to injury, these same taxpayers were stuck with footing the bill to bail out institutions “too big to fail.”

In a riveting narrative, Morgenson and Rosner expose the guilty culprits in both the private and public sector. To learn why “power corrupts and absolute power corrupts absolutely,” spend a few hours on the beach reading “Reckless Endangerment.”

Explore posts in the same categories: Articles/Essays/Op-Ed

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: