FIVE QUESTIONS FOR GRETCHEN MORGENSON: How Reckless Greed Nearly Took Down The American Financial System

gretchen morgenson

Courtesy of Bloomberg

Business Insider Politix checked in with Pulitzer Prize-winning New York Times financial reporter Gretchen Morgenson to talk about her new book, Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon.In the book, Morgenson and co-author Joshua Rosner, a housing finance expert, trace the beginnings of the 2008 financial meltdown, connecting the dots from Clinton’s push for home ownership in the mid-1990s  to the political ascent of mortgage giant Fannie Mae and, finally, to the subprime crisis.

Ultimately, the story reveals how Washington regulators not only failed to foresee or prevent the financial crisis, but were actually complicit in the greed and recklessness that drove the American financial system to the brink of collapse.  

Here’s what Morgenson had to say about her new book, available here.

1. Reckless Endangerment chronicles the role former Fannie Mae chief executive James Johnson played in the housing crisis, and, in particular, his political efforts to secure Fannie Mae’s government backing. What exactly was the relationship between the federal government and the mortgage giant? How was the government subsidizing Fannie Mae?

Gretchen Morgenson: James Johnson did not have to secure government backing for Fannie Mae…It was already there when he rose to the position of CEO of the company in 1991. But what was perhaps an even greater challenge was holding on to the lucrative perquisites associated with the company’s government ties.

The most important benefit was the company’s ability to raise money at considerably lower costs, because investors believed they would be protected by the government if the company got into trouble. The government created Fannie Mae in 1938 in the Depression as a way to make sure borrowers could have access to funding to buy homes. But in the 1960s, the company became semi-private, with shareholders to satisfy.

2. What do you believe will happen to Fannie Mae and Freddie Mac? What future role should the government have in financing home mortgages?

Morgenson: This is the $675 trillion question. I cannot predict what the government will decide to do with the companies. It is an enormous political football and my crystal ball is not that clear on what will transpire!

3. Very few people have been successfully prosecuted in connection to the financial crisis. In particular, you note that the Justice Department has ended its investigation of former Countrywide Financial CEO Angelo Mozilo and that the SEC never took any action against NovaStar Financial. Why do you think subprime mortgage lenders and bank executives have gotten off the hook?

Morgenson: I am not a lawyer and certainly not a prosecutor. But some legal experts have told me that they believe the dearth of prosecutions must be laid at the feet of regulators which did not do their jobs in the years leading up to the crisis and in the aftermath. Because regulators were not reining in reckless lending, they were not collecting the data and information necessary for cases to be brought NOW. So the regulatory failures had two effects — they did not protect borrowers during the boom and they did not produce cases after it.

4. You cite a number of instances in which the Federal Reserve ignored warning signs and was, in fact, a willing partner in relaxing the rules to suit the banks it was supposed to be regulating. Have problems with the Federal Reserve’s regulatory process since been addressed, either by the central bank or by Congress?

Morgenson: Problems with the Fed’s regulatory process remain and it has gained even more power under Dodd Frank. The potential for a regulator to become captured by the entities it regulates is always large and the Fed succumbed to this mightily during the years leading up to the crisis.

5. Your book describes how corporations began using political means to manipulate government regulation. Do you think the Dodd-Frank financial reform bill will reverse this trend and strengthen regulation? If not, where does it fall short? Does the legislation do enough to prevent another financial crisis?

Morgenson: The single biggest failure of Dodd-Frank was to deal effectively with too big to fail institutions. The legislation did nothing to cut these institutions down to a manageable size. Therefore we are still at risk of another crisis.