RECKLE$$ ENDANGERMENT
Gretchen Morgenson and Joshua Rosner
Book Review and Summary by Chris Jansante
March 30, 2012
The book RECKLES$ ENDANGERMENT describes the origins of the epic, worldwide financial crisis of 2008. The researchers claimed the foundation for this book took 10 years of research and the vast amount of detail corroborates that claim. This work lists every major character, organization and event involved over a 20 year period leading up to the 2008 financial crash and illustrates how each contributed to the crisis. This publication clarifies the enormous criminal and quasi-legitimate enterprises that not only were responsible for the 2008 financial downfall but also for the coming collapse during our lifetime, which will be referenced at the end of this review. If it is possible for a book about economics to be considered shocking, to me, this one qualifies. I also find it remarkable that in this age of media cover-ups, a book that is so revealing about people who are still alive has been published.
This is one of only a very few books about America I have read lately that I consider to be of compelling importance in my lifetime. This is a text that certainly could be looked at as a very valuable reference book; it could help future generations understand the truth about America's financial problems at the beginning of the 21st century and how it affected their lives. The information in this work will be needed after memories fade and after progressives of both major parties, eager to whitewash their roles in these events, try to erase all this incriminating history.
Reading and digesting the information of RECKLES$ ENDANGERMENT was a more complex task than some college courses I've taken. In some ways it was like reading an academic textbook. However, the multiple intricacies of events are braided together so much that I actually read the book several times to understand the bigger picture and document this understanding. I'm glad I did. RECKLES$ ENDANGERMENT is certainly recommended for the investigative patriot who cares about preserving history.
Here is a very general summary of topics and events in RECKLES$ ENDANGERMENT:
Possibly, the original source for the ideas that were distorted by financial entities came from FDR's Home Owners Loan Corporation that granted the refinancing of one million homes in trouble during 1933 to 1936. In 1994, President Clinton created the National Partners in Homeownership. His goal was to have 70% of Americans own their own homes by the year 2000. Home ownership was 64% at the time his goal was stated.
Government loan guaranty agencies Fannie Mae and Freddie Mac started the mortgage mania under James A. Johnson. Johnson was a past roommate of William J. Clinton, was on Walter Mondale's election committee, was a senior advisor to candidate John Kerry, hosted a party to honor candidate Barak Obama at his home, and continues to be reaping financial rewards on many corporate boards such as Target's, Goldman Sachs, KB Homes (now bankrupt) and the Brookings Institute. Johnson left Fannie Mae some years ago, but before he left, Johnson and Clinton coordinated their housing efforts closely in the 1990's to achieve very different but intertwining goals.
Johnson's leadership led the way in loose lending practices. Fannie Mae was on sound footing prior to Johnson. Under Johnson, Fannie Mae's primary goals became protecting its government ties and the riches he earned for himself and his team.
In 1992, the Boston Federal Reserve Bank put out a flawed study that claimed discrimination in housing lending existed. Groups like ACORN and La Raza took the cue, claiming discrimination not only existed, but that it was rampant, pointedly accusing institutions like Wells Fargo. (ACORN originally was for tighter regulation of Fannie Mae until Fannie started issuing grants to organizations like ACORN.) Other banks got very concerned, especially when the Boston Fed put out a subsequent guide for banks with penalties threatened for non-compliance. Banks were relieved when the Boston Fed indicated that if banks followed the new guidelines for looser lending, that they could off-load those questionable loans to the government. Banks could make more loans, thus more money, and not be responsible for defaults. The sub-prime loan market was created.
As bad as that was, there was a very hidden amendment to a 1991 law put there by Christopher Dodd. That amendment started guaranteeing questionable loans for insurance companies. The floodgates of risky credit began slowly opening. Personal interviews of housing applicants, past payment histories, how much borrowers owed, required down payments--all changed, and not for the better. Sub-prime loans quadrupled in 4 years.
Supervision of Fannie Mae was switched from its current tough regulator to the New York Federal Reserve, which was "captive to the entities it regulated". Effectively, Fannie Mae was largely in charge of itself, with no real oversight.
Johnson announced his "Trillion Dollar Commitment" for Fannie Mae loans. Fannie Mae began opening local offices in 55 American cities. Newt Gingrich attended the Atlanta office opening, speaking quite positively about that event. HUD overseers knew the primary function of these offices was to have access to members of congress locally. Using his political office, Barney Frank protected Fannie Mae from the outset of the Clinton programs. Coincidentally, his mother, Elsie Frank, won an important award from Fannie Mae. It wasn't until 2010, while running for re-election in a difficult race, did Frank ever say anything publicly negative about Fannie Mae and Freddie Mac, calling for their abolishment. [As we know, Frank later dropped out of the race.]
Johnson started something new at Fannie Mae. He began advertising, political contributions and charitable giving. Fannie Mae's money went to PACs, charitable organizations, advertisers and mortgage underwriters. Many hundreds of millions were dispensed to reach his goals. Using funds and influence, he beat back multiple attempts to privatize Fannie Mae or to put new regulators in place that would rein it in. He also stopped DC council members attempts to get Fannie to pay local income taxes. His techniques were described as "ruthless" and his employees were said to have acted like the "mafia". Johnson's ultimate motivation was the $100 million in total compensation he received during his time at Fannie Mae.
In 1997, HUD Director Andrew Cuomo, Fannie Mae's regulator, instructed banks to issue more sub-prime loans; by 1999, they were instructed to have at least 50% sub-prime loans each year. Failure to comply could cost a bank up to $10,000 per day in fines, Cuomo said. In 1998, the NY Fed bailed out a hedge fund from collapse, Long Term Capital Management. Also in 1998, Bear Stearns gave $200 million to a mortgage company founded by a 19 year old that later went bankrupt, but did not learn from this event. In 1999, President Clinton, Alan Greenspan and Phil Gramm repealed a law (Glass-Steagall) that kept insurance companies from acting like banks and kept commercial banks from being allowed to invest their customers' funds in risky speculations. Proper regulations realistically ceased to exist.
Fannie Mae now determined how much of the "savings" they created for homeowners went to itself, although publicly they claimed every dollar of savings went to homeowners. Bonuses were subject to earnings, which always magically just reached the optimum for maximum bonuses. Bonus amounts were not released to the public.
In 2001, an organization called the Basel Committee, consisting of the USA and 9 other countries, made recommendations to reduce capital requirements for banks and increase the role of credit rating agencies that were implemented. Credit rating agencies, benefiting profitably from each mortgage that they reviewed, now gave high ratings, deserved or not, to lenders and creditors, as well as to bundled loan packages for investors. Equifax created a new credit scoring system that cut mortgage review time down from the hours it took previously. Mortgages could now easily be approved by the hundreds. Later on, these agencies routinely issued disclaimers that they did not guarantee their ratings to be accurate and that was accepted. S&P rated Fannie Mae as AAA right up to three weeks before taxpayers took it over. They all became Fannie Mae's partners; all these partners made a lot of money.
In 2003, Maxine Waters asked for loans to be made with no money down. Countrywide Financial, whose CEO was personally close with James Johnson, complied. Others followed this lead. Waters and Frank each kept defending Fannie Mae in 2003 with public statements. Multiple warnings from various sources about Fannie Mae's exposure to collapse were made over the years and were always dismissed.
In 2004, Fannie's new leader, Franklin Raines, was removed by its regulator for violations, but that removal did not slow down the mortgage mania. Wall Street firms like Bear Stearns, Lehman Brothers, Morgan Stanley, Goldman Sachs, and Fremont Indemnity provided lines of credit for hundreds of thousands of risky loans; now they all would be bailed out by taxpayers if they got into trouble. Fremont's credit rating was not only sustained as being good, but it also was upgraded by Fitch just the year before Fremont collapsed, went bankrupt and even had to sell its fine collection of Ansel Adams photographs. New mortgage techniques (like CDOs and TRUPs) were created by Wall Street that let them hide bad mortgages in bundles of good ones and, with the credit rating agencies' help, sell them to unsuspecting investors as good quality. There was no illusion whether or not they were aware the securities were filled with what they called "liar loans". In 2006, Fed Chairman Ben Bernanke abrogated all responsibility about dealing with dangerous housing bubbles that might arise when he said publicly that the Fed "doesn't have any more economic information than anyone else" and thus shouldn't be expected to address possible bubbles.
New accounting techniques were devised that made companies like Citibank appear much more sound and profitable than they actually were (e.g., gain-on-sale accounting). These shady gimmicks directly and indirectly fueled even more sub-prime loans.
The results of sub-prime lending were very negative. Dreams were destroyed. Nearing the crash of 2008, homeownership, a foundation of the American economy, was no longer a certain route to a secure spot in middle class America. Rash behavior became the norm. In 2005 alone, homeowners extracted three-quarters of a trillion dollars from homes with inflated appraisals, spending it on credit card debt, personal consumption and home improvements. Many of these homes' values dropped later, sellable only at a loss. A rash of bankruptcies occurred when unqualified buyers could not continue to make their payments. Some borrowers were so financially unfit that they never made even one mortgage payment. For many sub-prime borrowers, homeownership became a path to their own financial destruction.
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The authors brought up the question, "Will a debacle like the credit risk crisis of 2008 ever happen again?" Their answer was unequivocal:
"Most certainly, because Congress decided against fixing the problem of too-big-to-fail institutions when it had its chance.
"The law that Congress devised in response to the crisis was called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It spanned more than fifteen hundred pages; Glass-Steagall, a law that protected consumers for sixty-six years, consisted of only thirty-four.
"The irony of having two of the nation's most strident defenders of Fannie Mae sponsoring the new reform act was lost on few of the those who knew the entire sordid Fannie story. And yet the law failed the most basic test--it did not insist that large and unmanageable institutions be cut down to size to alleviate their threats to taxpayers in the future. Nor did it increase the accountability of those running institutions that will need government assistance in the future.
"The law was also silent on how to resolve the insolvent Freddie Mac and Fannie Mae."
[As of today's date, there is still time to prepare in our own lives.]
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