Book Points Fingers At Those With Roles In Financial Collapse
By Barbara Murphy
Contributing Writer
The financial crash of 2008, which produced the first Great Recession and may produce a second, was not the work of faceless, malevolent economic forces over which we have no control.
It was the work of greedy human beings who have names and faces. They are identified — many for the first time publicly — in the book “Reckless Endangerment” co-authored by Gretchen Morgenson, Pulitzer Prize-winning financial writer for the New York Times, and Joshua Rosner, partner at an independent research consulting firm.
What follows is my partial list of those identified in the book as having played a major role in creating the financial crisis that devastated IRAs and 401k retirement savings accounts and caused millions of Americans, many of them seniors, to lose their homes.
First on the list is Bill Clinton. He gets first place for launching the National Partners in Homeownership program, a private-public cooperative whose goal was to greatly increase the number of homeowners across America. The partnership planned to do this by enabling poor Americans to get mortgages they ultimately could not afford.
The Partners’ strategy in achieving its goals, according to the authors, included “expanding creative financing, and simplifying the home buying process.” President Clinton ignored warnings from a number of economic experts that the plan would lead to disaster because many low income Americans simply do not have enough money to buy and maintain homes and would be better off renting.
Second on the list is James A. Johnson, former chief director of Fannie Mae, the huge and powerful government-sponsored (but privately owned) agency set up in 1938 to help people buy homes in the Great Depression by subsidizing mortgages.
The authors said: “Under the direction of Johnson, Fannie Mae’s calculating and politically connected chief executive, the company capitalized on its government ties, building itself into one of the world’s largest and most powerful institutions.” This was largely achieved by buying up subprime mortgages provided to the poor and unsophisticated people who unfortunately lived in a country whose financial leaders proclaimed that housing prices would never go down.
Fannie Mae sold the mortgages to Wall Street firms who packaged them into securities and sold them to investors who should have been but were not sharp enough to take a hard look at what they were buying, instead of simply grabbing at something that was essentially toxic.
Third on the list is Barney Frank, the powerful Massachusetts Democrat, who was an ardent supporter of Fannie Mae. When asked if he wasn’t worried about people being financially ruined by buying houses they could not afford, Mr. Frank’s answer was “we’ll deal with that problem if it happens.” Ms. Morgenson and Mr. Rosner said “Frank was a perpetual protector of Fannie and those in his orbit were rewarded by the company.”
Number four is David Silipigno, founder of National Finance Corp., which in 1998 launched a successful home-equity loan securitization program through Bear Stearns. The latter hoped National Finance, a mortgage origination machine, could provide many layers of fees to Bear Stearns. Unfortunately, a world financial crisis triggered when the Russian government devalued its currency killed the dream. As investors panicked and moved to liquidate risky positions, Long-Term Capital Management, a large hedge fund, imploded. Taxpayer money was used to bail out this hedge fund.
When National Finance failed to produce the returns Bear Stearns contemplated, the latter sent investigators to go over National Finance’s “numbers.” According to the authors, Mr. Silipigno finally made a phone call to Bear’s investigators stating: “You can keep trying to reconcile the numbers but you can’t make them reconcile because they won’t.” The authors said Mr. Silipigno allegedly admitted to falsifying loan schedules and bilking Bear Stearns out of $5.6 million. When word of this got out, the authors said, bankers wondered how Bear could have done such a shoddy job of due diligence on National Finance. “Ten years later,” the authors said, “Bear’s shareholders would wonder the same thing, albeit on a much larger scale.”
Number five is former Senator Phil Gramm (R-Texas), who led a successful fight in Congress in 1999 to kill the Glass-Steagall Act, which since the 1930s had maintained a wall between regular banks and investment banks. “With Glass-Steagall dead and gone,” the authors said, “financial institutions were now free to grow large and extend their tentacles into the farthest reaches of both the nation’s and the world’s economies.”
Number six is former Federal Reserve board chairman Alan Greenspan, who opposed all regulation of financial markets, believing the markets would regulate themselves. He has since admitted he was wrong.
Number seven is Angelo Mozilo, co-founder and former chief executive of Countrywide Financial, at one time one of the biggest subprime lenders in the world. After the meltdown, he was sued by the SEC for insider trading and fined several million dollars. Reportedly, his company paid most of the fine.
Ms. Morgenson and Mr. Rosner have some lists of their own. Among these is a list of “feckless regulators.” This list includes Timothy Geithner, now U.S. Treasury Secretary; Greenspan; Frederic Mishkin, former Federal Reserve governor; and Andrew Cuomo, former Secretary of the Department of Housing and Urban Development (HUD), now governor of New York.
The authors said “friends of Fannie Mae” included former U.S. Treasury secretary Robert Rubin, known as the “master of deregulation;” former U.S. Treasury secretary Larry Summer; and Peter Orszag, senior economist on the Council of Economic Advisors.
Finally, the authors compiled a list of “doubters and those who pushed back,” in other words, the good guys.
Heading this list is Dean Baker, co-director of the Center for Economic and Policy Research, who co-authored with Ron Feldman, a 2002 paper warning that home prices were on an unsustainable trajectory that clearly indicated a housing bubble. When it burst, the paper warned, the impact would be disastrous.
Also on the good guy list is Marvin Phaup of the Congressional Budget Office (CBO), who scrutinized the finances of Fannie Mae and its sidekick, Freddie Mac, and concluded that the taxpayer subsidy they were getting was a poor use of government money. The authors said that Mr. Phaup’s report concluded: “the money these companies were reaping from their implied guarantees allowed them to distort the political process. Taxpayers were essentially, if unknowingly, handing the companies millions of dollars each year with which they [the companies] funded their protection game.” After the Phaup report was published, Mr. Phaup was asked to resign. However, his boss, June O’Neill (another good guy) vigorously defended his report before Congress. Mr. Phaup remained at the CBO, yet Congress ignored the report.
“Reckless Endangerment” does a lot more than name names of those involved in the crisis. It emphasizes just how corrupt our financial system and our political system are. There were a few good people who tried to stop this grand robbery of the country’s wealth, but there were thousands who participated in the crime and only a tiny fraction of them have been brought to justice.
*
(Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner, published by Times Books-Henry Holt & Co., New York, NY, 331 pages; Retail price $30).
By Barbara Murphy
Contributing Writer
The financial crash of 2008, which produced the first Great Recession and may produce a second, was not the work of faceless, malevolent economic forces over which we have no control.
It was the work of greedy human beings who have names and faces. They are identified — many for the first time publicly — in the book “Reckless Endangerment” co-authored by Gretchen Morgenson, Pulitzer Prize-winning financial writer for the New York Times, and Joshua Rosner, partner at an independent research consulting firm.
What follows is my partial list of those identified in the book as having played a major role in creating the financial crisis that devastated IRAs and 401k retirement savings accounts and caused millions of Americans, many of them seniors, to lose their homes.
First on the list is Bill Clinton. He gets first place for launching the National Partners in Homeownership program, a private-public cooperative whose goal was to greatly increase the number of homeowners across America. The partnership planned to do this by enabling poor Americans to get mortgages they ultimately could not afford.
The Partners’ strategy in achieving its goals, according to the authors, included “expanding creative financing, and simplifying the home buying process.” President Clinton ignored warnings from a number of economic experts that the plan would lead to disaster because many low income Americans simply do not have enough money to buy and maintain homes and would be better off renting.
Second on the list is James A. Johnson, former chief director of Fannie Mae, the huge and powerful government-sponsored (but privately owned) agency set up in 1938 to help people buy homes in the Great Depression by subsidizing mortgages.
The authors said: “Under the direction of Johnson, Fannie Mae’s calculating and politically connected chief executive, the company capitalized on its government ties, building itself into one of the world’s largest and most powerful institutions.” This was largely achieved by buying up subprime mortgages provided to the poor and unsophisticated people who unfortunately lived in a country whose financial leaders proclaimed that housing prices would never go down.
Fannie Mae sold the mortgages to Wall Street firms who packaged them into securities and sold them to investors who should have been but were not sharp enough to take a hard look at what they were buying, instead of simply grabbing at something that was essentially toxic.
Third on the list is Barney Frank, the powerful Massachusetts Democrat, who was an ardent supporter of Fannie Mae. When asked if he wasn’t worried about people being financially ruined by buying houses they could not afford, Mr. Frank’s answer was “we’ll deal with that problem if it happens.” Ms. Morgenson and Mr. Rosner said “Frank was a perpetual protector of Fannie and those in his orbit were rewarded by the company.”
Number four is David Silipigno, founder of National Finance Corp., which in 1998 launched a successful home-equity loan securitization program through Bear Stearns. The latter hoped National Finance, a mortgage origination machine, could provide many layers of fees to Bear Stearns. Unfortunately, a world financial crisis triggered when the Russian government devalued its currency killed the dream. As investors panicked and moved to liquidate risky positions, Long-Term Capital Management, a large hedge fund, imploded. Taxpayer money was used to bail out this hedge fund.
When National Finance failed to produce the returns Bear Stearns contemplated, the latter sent investigators to go over National Finance’s “numbers.” According to the authors, Mr. Silipigno finally made a phone call to Bear’s investigators stating: “You can keep trying to reconcile the numbers but you can’t make them reconcile because they won’t.” The authors said Mr. Silipigno allegedly admitted to falsifying loan schedules and bilking Bear Stearns out of $5.6 million. When word of this got out, the authors said, bankers wondered how Bear could have done such a shoddy job of due diligence on National Finance. “Ten years later,” the authors said, “Bear’s shareholders would wonder the same thing, albeit on a much larger scale.”
Number five is former Senator Phil Gramm (R-Texas), who led a successful fight in Congress in 1999 to kill the Glass-Steagall Act, which since the 1930s had maintained a wall between regular banks and investment banks. “With Glass-Steagall dead and gone,” the authors said, “financial institutions were now free to grow large and extend their tentacles into the farthest reaches of both the nation’s and the world’s economies.”
Number six is former Federal Reserve board chairman Alan Greenspan, who opposed all regulation of financial markets, believing the markets would regulate themselves. He has since admitted he was wrong.
Number seven is Angelo Mozilo, co-founder and former chief executive of Countrywide Financial, at one time one of the biggest subprime lenders in the world. After the meltdown, he was sued by the SEC for insider trading and fined several million dollars. Reportedly, his company paid most of the fine.
Ms. Morgenson and Mr. Rosner have some lists of their own. Among these is a list of “feckless regulators.” This list includes Timothy Geithner, now U.S. Treasury Secretary; Greenspan; Frederic Mishkin, former Federal Reserve governor; and Andrew Cuomo, former Secretary of the Department of Housing and Urban Development (HUD), now governor of New York.
The authors said “friends of Fannie Mae” included former U.S. Treasury secretary Robert Rubin, known as the “master of deregulation;” former U.S. Treasury secretary Larry Summer; and Peter Orszag, senior economist on the Council of Economic Advisors.
Finally, the authors compiled a list of “doubters and those who pushed back,” in other words, the good guys.
Heading this list is Dean Baker, co-director of the Center for Economic and Policy Research, who co-authored with Ron Feldman, a 2002 paper warning that home prices were on an unsustainable trajectory that clearly indicated a housing bubble. When it burst, the paper warned, the impact would be disastrous.
Also on the good guy list is Marvin Phaup of the Congressional Budget Office (CBO), who scrutinized the finances of Fannie Mae and its sidekick, Freddie Mac, and concluded that the taxpayer subsidy they were getting was a poor use of government money. The authors said that Mr. Phaup’s report concluded: “the money these companies were reaping from their implied guarantees allowed them to distort the political process. Taxpayers were essentially, if unknowingly, handing the companies millions of dollars each year with which they [the companies] funded their protection game.” After the Phaup report was published, Mr. Phaup was asked to resign. However, his boss, June O’Neill (another good guy) vigorously defended his report before Congress. Mr. Phaup remained at the CBO, yet Congress ignored the report.
“Reckless Endangerment” does a lot more than name names of those involved in the crisis. It emphasizes just how corrupt our financial system and our political system are. There were a few good people who tried to stop this grand robbery of the country’s wealth, but there were thousands who participated in the crime and only a tiny fraction of them have been brought to justice.
*
(Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner, published by Times Books-Henry Holt & Co., New York, NY, 331 pages; Retail price $30).
