By Gretchen Morgenson and Joshua Rosner, Henry Holt and Company, New York, N.Y. 331 pages, $30
‘Auri sacra fames,” declaimed the poet Virgil. “O execrable love of gold!” “Reckless Endangerment” tells of the wreckage that unrestrained and unpunished greed in the years leading up to the financial crisis of 2008 caused the nation’s economy and people. Gretchen Morgenson’s muckraking column in the Sunday New York Times has special appeal to lawyers. Collaborating with Joshua Rosner, a securities analyst, she has created a book likewise of significance to the profession.
In her introduction, Morgenson, the senior partner in the joint authorship, calls the book “an economic whodunit.” She might better have named it a horror story. To this day, the country suffers from the recession aggravated if not caused by what the authors authoritatively depict as foolhardy, shortsighted and irresponsible conduct by a broad collection of individuals, including persons at or near the top of the official and financial hierarchies.
According to the authors, the trouble began in November 1994, when President Bill Clinton formed the National Partners in Home Ownership. To be composed of public and private entities, its goal was to “expand the American Dream” by sharply increasing the percentage of families owning their homes.
To carry out this ambitious program, the government recruited not only its own officers and agencies but also a broad cross-section of industry. It included banks, builders, securities firms, real estate agents and others, “65 top national organizations and 131 smaller groups.”
The authors see two major flaws in the very idea of the partnership. First, teaming regulators with the entities they were supposedly policing should have given pause. Secondly, it seems not to have occurred to anyone involved that some lower-income families, the intended beneficiaries of the program, might be better off renting than trying to purchase their homes.
Be that as it may, the program took off at full speed. Morgenson and Rosner show how, step by step, “all of the venerable rules governing the relationship between borrower and lender went out the window.” As the years went by, the wholesale extraction of mortgages from persons unable to afford them turned “the American Dream” into a national nightmare.
As one step in the process, Congress in 1999 repealed the Glass-Steagall Act. Enacted in 1933, that statute, among other things, separated commercial and investment banking. As the authors put it, it “protected consumers and individual investors from rapacious bankers.” Its repeal broadened what commercial banks could do with their depositors’ money.
The authors call the repeal of Glass-Steagall “a crucial step on the road to financial perdition known as Too Big to Fail.” An illustration in the book pictures a beaming Mr. Clinton at the signature of the repeal measure. The group shown applauding him includes the chairmen of the Federal Reserve Board and the Securities and Exchange Commission.
The repeal of Glass-Steagall and many like steps manifested a philosophy inherited from the Reagan administration and by no means extinct today. Government is the problem, not the solution, according to this philosophy. It follows, the theory goes, that banks and other private enterprises, if freed of regulation, will act consistently with the public interest. The authors reject this philosophy. Their every page reflects their rejection.
By 2003, the authors show, “the push for home-ownership was becoming a runaway train.” In that year a record $3.84 trillion in mortgages was written. Fortunes had been made and were being made by executives of financial institutions.
Leaders of the two government-sponsored entities, Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), shared in the bonanza. Fannie Mae became “the largest and most powerful financial institution in the world.” In nine years at Fannie Mae, the man who served as its CEO from 1991 to 1998 took in “roughly $100 million in pay.”
The tactics that lenders and others employed to stimulate the mortgage business ranged from fancy footwork to downright fraud. Borrowers were lured by increasingly favorable terms, including eventually no-money-down and interest-only loans. Mortgage applications were falsified by exaggerations of borrowers’ incomes and assets and by misrepresentation of credit histories. Other dirty work, the authors show, abounded.
Securitization played a key role in the boom. Mortgages were bundled together and the bundle sold to an investor as a security. The most respected and prestigious firms on Wall Street participated eagerly and profitably, say the authors, in the financing of these mortgage-backed securities.
It could not and did not last. Homeowners began defaulting on and facing foreclosure of mortgages they never should have entered into. Financial institutions discovered misrepresentations as to the quality of the mortgages wrapped up in the securities they had bought. The bubble in housing prices burst, and the country slid into recession. In 2008 the government, at a cost to taxpayers that the authors estimate as hundreds of billions, took over Fannie Mae and Freddie Mac. “[N]o criminal charges,” the authors lament, “were ever filed against any of their employees or executives.”
When it comes to documentation, the book falls short of perfection. It contains no source footnotes. In her Notes on Sources, Ms. Morgenson tells of the many persons interviewed and the array of documents consulted in preparation of the book. Yet the text rarely specifies where a given fact or opinion comes from. Thus the hypercritical reader may adjudge “Reckless Endangerment” a work of polemics rather than of scholarship.
The authors’ reputations, however, guarantee the book’s reliability. Lawyers should see it as a convincing revelation how Virgil’s execrable love of gold, combined with official laxity, gullibility and shortsightedness, can inflict widespread, painful and enduring harm.
Walter Barthold is retired from the practice of law in New York City.