NYT business reporter Gretchen Morgensen discusses her new book and the corruption of the mortgage lending industry.
July 26, 2011 | Gretchen Morgensen was awarded the Pulitzer Prize in 2002 for her “trenchant and incisive” coverage of Wall Street and has been on that beat ever since. Her new book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (written with Joshua Rosner), lays out the toxic interplay between Washington, Wall Street and corrupt mortgage lenders that led to the meltdown. It examines how the watchdogs who were supposed to protect us from financial harm were actually complicit in creating the crisis.
Gretchen Morgenson is a business reporter and columnist at the New York Times, where she also serves as assistant business and financial editor. Prior to joining the Times in 1998, she worked as a broker at Dean Witter in the 1980s, and as a reporter at Forbes, Worth, and Money magazines.
Terrence McNally: What do you consider your path to the work you do today?
Gretchen Morgensen: I worked on Wall Street for three years, not a long time, but I did get a really good sense of how that place operates. People on Wall Street are extremely smart, aggressive and creative. They are also the intermediary for a lot of companies trying to raise capital, and can be a real facilitator for good. But in this crisis, that got started with a vengeance in the early ‘90s and built up to where we were in 2008 when many of these firms had to be taken over, Wall Street has had more of a pernicious impact. Some of their creativity has been used not to benefit investors, not to benefit Main Street, but simply to benefit themselves.
TM: Can you briefly lay out how Wall Street, Washington and the mortgage lenders danced together?
GM: One of the crucial parties that we focus on quite a bit in the book is Fannie Mae, the mortgage finance giant created in 1938 by the government to help facilitate lending to borrowers in the midst of the Depression. It was a noble idea, a noble cause. The company then morphed into a private company with shareholders to satisfy. We peg the beginning of the process that led to this crisis to Fannie Mae’s becoming a political animal in the early 1990’s. After the S&L crisis, Congress set about to try to write some legislation that would protect the taxpayer from losses arising at Fannie Mae and [its partner] Freddie Mac. And that process got completely perverted by James Johnson, the chief executive of the company from 1991 to 1998. Mr. Johnson is a powerhouse in Washington. Even now he is head of the compensation committee at Goldman Sachs’ board. He understood that he had to protect the company’s very lucrative, very rich government ties at all costs.
That meant that he had to neutralize his regulator. He had to buy off Congress. He had to form “grassroots” organizations across the country promoting home ownership that Fannie Mae could participate in as a do-gooder. It was all wrapped in the American flag of home ownership, but the subtext was to protect the company, protect top executives’ paychecks, and protect at all costs the government tie that was so lucrative.
TM: You write that Johnson came up with the game plan for how to neutralize and capture your financial regulator, which we’ve seen spread everywhere since then.
GM: Going into this crisis, we had only two companies that were too-big-to-fail and had the implicit — which then became explicit — backing of the U.S. taxpayer: Fannie Mae and Freddie Mac. Now, after the events of 2008, we have many more too-big-to-fail institutions — Citi Group, Bank of America, JP Morgan Chase, Goldman Sachs, all those banks that were rescued by the taxpayer in 2008 we now know are too big to fail. I think that this wrapping oneself in the American flag of home ownership, co-opting Congress, co-opting your regulator — the strategy that Fannie Mae brought to a very high level — was watched and mimicked by many of these institutions.
TM: Listeners to right-wing talk radio might believe Fannie Mae and Freddie Mac are the total cause of the crisis. Clearly, that’s not true. But, according to your book, they played a bigger role than I’d assumed. Could you comment on that and give us the dollar figure of how much we’re in hock on those two? I think that’s a number that might scare people.
GM: That number is $150 billion at the moment. Both were taken into conservatorship by the government over Labor Day weekend in 2008, becoming wards of the taxpayer. There is supposed to be discussion this year about what to do with Fannie Mae and Freddie Mac, but it’s a political third rail, and I see no chance of having an honest discussion about housing policy.
TM: After the S&L crisis, we were going to fix Fannie and Freddie, but things only got worse. When you ask the fox how to clean the henhouse…
GM: You make a good point about who’s to blame. Blame falls on both sides of the aisle in Congress. It’s not an either-or, Democratic or Republican issue, not a liberal or conservative issue — there’s enough blame to go around. Fannie Mae and Freddie Mac were primary movers in the push for home ownership. And there’s nothing wrong with that, owning your own home is a deep-seated wish in the American psyche. The problem was in the execution. You don’t lure people in who are unsophisticated, who don’t understand what they’re doing. You certainly don’t offer them the kinds of poisonous loans that were targeted to minority borrowers; low-income borrowers; first-time home buyers.
TM: Targeted by Fannie and Freddie or targeted by predatory mortgage lenders?
GM: This is where Fannie and Freddie step aside and the mortgage lenders step into the breach. Countrywide was Fannie Mae’s biggest provider of loans. A lot of the losses that taxpayers are footing at this moment came very late in the game, in 2005, 2006, mortgages that were really ugly and really poisonous. Fannie Mae led the way, pushing for home ownership, degrading underwriting standards, pushing for more relaxed lending standards. Then the predatory lenders take the ball and run with it because there’s so much money to be made.
TM: And because of Fannie Mae’s initiative, so little risk.
GM: So little risk. Fannie Mae was either guaranteeing the loans that Countrywide and other lenders were making or taking them into their own portfolios. The taxpayer was essentially taking on the risk. There is an unholy alliance between Fannie Mae, a government sponsored enterprise, and predatory lenders and Wall Street. Wall Street saw Fannie Mae creating pools of loans that they would sell to others to sell to investors. Wall Street took that ball and ran with it, issuing trillions of dollars in mortgage-backed securities bursting with predatory loans.
TM: And they knew that.
GM: And they knew that.
TM: In 2004, a neighbor of mine, a math PhD at UCLA, asked me if I was paying attention to the mortgage crisis. I said what mortgage crisis? He told me he was reading some blogs and that hell was coming around the corner. At that point, he didn’t mention the “sub-prime” credit default swaps or securitization. He was simply talking about zero interest loans with balloon payments in five years. People might be able to afford what they just got into, but in five years – or sooner — we’re going to have a crisis. So without even talking about sub-prime, these gimmicky loans were going to blow up. Am I correct, that it’s like phase one, then phase two?
GM: Absolutely correct and that guy is very prescient. Don’t forget that housing prices were going higher and higher, and many people were shut out of housing by the high prices. So lenders came up with these cockamamie mortgages where you didn’t have to put any money down; or where they would give you the second loan on top of the first; or where you would choose what you would pay each month in interest and principal, and maybe not pay down the principal at all. So you’re perverting the very idea of paying down a debt over time in order to have an asset at the end of the day.
TM: The original vision basically works from the Depression until it gets perverted in the 2000s: a home enabled the middle-class to save and obtain an asset to pass on.
GM: Almost a forced savings account. You pay down your mortgage, and at the end you have a mortgage-burning party, and you own the asset free and clear. We turned that on its head by creating home equity lines of credit, where you can take the equity out of the home. And now that home prices have fallen, many people are underwater, owing more than their home is worth.
TM: In that period even people who could afford the original loan on their house, began to refinance. I didn’t even own a home, and I would get phone calls and emails regularly asking me if I wanted to refi.
GM: People would extract equity from their home on a regular basis. A lot of people want to blame those borrowers, because they were taking vacations or putting in Viking stoves, but don’t forget, incomes were stagnant throughout that entire period. People were forced to have two workers in the family, with college education costs rising, health-care costs rising, and incomes stagnant. This became a way for people to live by extracting equity from their homes.
TM: When I look at where we are now with the slow pace of the recovery, I can see missteps in Washington and so on, but it seems to me, weren’t we just forestalling the inevitable? A lot of the jobs that aren’t coming back were never going to come back, but we were able to forestall the reckoning because people lived on their credit cards and on the equity in their homes. And as you said, they needed that to live a certain middle-class lifestyle — to have the new DVD player, to have the new big screen, the RV and so on. My sense is, that when you subtract credit card debt and refis — we really don’t have the wealth we thought we had. A lot of our middle class aren’t going to get their jobs back because they don’t really exist.
GM: Well, of course the housing industrial complex, which is the sort of realtors, the home builders, the Wall Street financiers, there is a big part of the economy that housing touches in many ways – appliances that you buy when you build a new home, etc. A lot of those jobs aren’t coming back because housing is really still to this day very depressed, so yes, there is a huge problem with unemployment that is directly related to this boom which went far farther than it should have been allowed to go.
TM: But I’m saying even jobs that aren’t directly related. Just that there was wealth floating around the country that didn’t really exist.
GM: Correct. It was phony, it was paper wealth.
TM: So you’re not going to go back to the restaurant as often as you used to, and you’re not going to buy the next gadget the way you bought the last one, because that money you didn’t really have was based on your credit card which was somehow tied to your fantasy that your house was always going to go up in value.
GM: And that you could extract money from the house, that the bank was willing to give you a home equity loan of credit because it was rising in value. Yes, those days are over. Maybe if we can learn to be a society that lives within our means, that would be a silver lining, a positive outcome. We don’t live within our means at a government level and that has got to stop. I hope we can have an honest dialogue in Washington about debt. We must learn to live within our means. I think that Main Street has begun to learn that lesson because they’ve been forced to, because they have not been given the bailouts that the major banks got.
TM: Part of why there’s a recovery on Wall Street and not on Main Street is that Wall Street is investing now in the same mortgage-backed securities that they dumped or where bailed out on, right?
GM: Very, very likely and buying them at pennies on the dollar when they issued them at 100 cents on the dollar. Picking up the pieces in a very profitable way.
TM: But Main Street is holding onto its money. If the consumer doesn’t come back, the future will look very different than the past.
GM: Absolutely. If people think they’re going back to the past, they’re really crazy. Don’t forget we’re also punishing savers right now, because you cannot get a return of any kind in any kind of a safe instrument. A savings account will give you nothing; a Treasury bill will give you nothing. So the very people that were prudent are being punished now. There’s so many paradoxes in this story that really need to be examined.
TM: On Fannie and Freddie, we’re out $150 billion. What’s the state of the bailout? Where do we stand including all the interest-free loans?
GM: You know, that’s a very difficult question to answer. You will hear Treasury officials come out periodically and say we made money on the bailout, or Morgensen, or AIG. Don’t believe any of it. First of all, we haven’t made a profit until Fannie and Freddie are no longer into us for $150 billion dollars. The final reckoning has not been made, and there are many hidden costs that we cannot attribute yet to this episode. One of the biggest hidden costs is the assumption that we will bail these people out again if they get in trouble.
TM: So you’re saying it isn’t simply a question of money out-money in. We changed the rules of the game, and they know the new rules are that we’ll bail them out again.
GM: And next time around, what is the cost going to be?
TM: There’s a ticking time bomb out there…
GM: Our affirmation to them that we will bail them out has a cost.
TM: Another cost is that they borrow money cheaper than community banks do. So again the savers get screwed, the banks who were prudent get screwed.
GM: Exactly, another paradox of this very sad story.
TM: Both political parties are funded by the same big interests, the finance industry being perhaps the biggest. Finance used to be 7 percent of the economy, now it 20 percent. This is a distortion. Because our political campaigns are so much more expensive than other countries, the people with the money ultimately own both parties. Republicans have an advantage. Their principles are in line with their funders, so they go for touchdowns. Democrats claim to have some progressive principles, but when they conflict with their funders, they don’t go for touchdowns, they go for maybe the 20 yard line. Medicare for all was off the table, they opened with a public option, and gave that up. One side goes full out while the other constantly negotiates with themselves. I don’t think the citizens stand much of a chance.
GM: I agree 100 percent. The moneyed interests are so powerful in Washington nowadays. I don’t have the historical perspective, because I’m not a Washington reporter, but it does seem to me to be power of moneyed interests in Washington is much more pernicious than it was in the past. After the banks put us into the drink, required bailouts in the hundreds of billions of dollars; ruined lives; forced people from their homes; caused huge job losses; so much pain. The fact that they are lobbying Washington with even more power and arrogance today tells you everything you need to know. Wouldn’t you be embarrassed after you’ve almost wrecked the world economy? But no. The banks are bigger than ever in Washington, swaggering around town asking for what they want — and getting a lot of it.
TM: We read about Greece, Spain, Portugal, Ireland, countries in Europe that are in a lot of trouble. How much of that is because they bet with us?
GM: We absolutely exported many of these toxic loans to overseas institutions. There is no doubt about that. Two German banks failed because of these. One of America’s most unfortunate exports, toxic mortgage securities. But I think there is a sense overseas of living beyond your means. Greece and some of these countries don’t have the tax revenues to pay for the services they provide. Something’s got to give.
TM: I think the biggest problem we’re facing is inequity. The grievous inequity now between the super rich and the corporations on one side and nearly everyone else on the other, means we won’t have the education we need; we won’t have the healthcare we need; our kids will have less; we will not have the country that we imagine we have.
GM: Your last point is important, that we don’t have the country we imagined we have. America was supposed to be just; it was supposed to be equal. It has been confirmed by this crisis that there are two sets of rules: one for the big and powerful politically interconnected institutions and one for the rest of us. And as long as that perception is allowed to go on, I think it is extremely pernicious. One of the elements that I think hurts and troubles people immeasurably is that, after this crisis, trillions of dollars lost; jobs lost; homes lost; so much pain — how many people have gone to jail? For being involved in these losses? There’s one criminal prosecution of a mortgage executive at Taylor, Bean and Whittaker. The others are civil cases. That really fuels and feeds this notion of two sets of rules, which is not the America that we know and love.
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