Review Of The New Book "Reckless Endangerment" Shows The Government Played A Role In The Financial Crisis

See Home Truths: To keep itself politically bullet-proof, Fannie Mae paid competing lobbyists to sit on the sidelines by JAMES FREEMAN in the WSJ, 6-3. Excerpts:

"This is a story, the authors say, "of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.""

"Encouraged by politicians to expand home lending—not least to minorities and to households with few assets—the company ignored reasonable standards of underwriting and piled up fugitive profits almost as fast as it increased risk to taxpayers."

"As for the borrowers who were supposedly to benefit from Fannie's mortgage-industrial complex, Ms. Morgenson and Mr. Rosner write that home ownership "put them squarely on the road to personal and financial ruin."

The disaster would not have been possible, the authors make clear, without the early efforts of James Johnson, Fannie Mae's chief executive in the 1990s and one of the Beltway's most connected figures..."

"...Mr. Johnson had little background in financial markets. When he was chosen to head up Fannie Mae, in 1991, he quickly grasped that the key to Fannie's success, and to his own astronomical bonuses, was persuading Congress to maintain Fannie's implicit government backing while preventing any bank-style regulation to interfere with the company's operation.

That Fannie and its cousin, Freddie Mac, had been created by the government to provide a secondary market for mortgages allowed them to borrow more cheaply than potential competitors."

"Mr. Johnson's state-of-the-art lobbying machine spread the fiction that Fannie's savings—the result of its lower borrowing costs—were routinely passed on to home borrowers whose loans it was buying. But a 1995 Congressional Budget Office analysis showed that Fannie and Freddie were keeping more than $2 billion of this combined annual subsidy for themselves."

"Not even a scandal in the mid-2000s over years-long accounting irregularities could persuade lawmakers to put limits on the amount of taxpayer risk that the companies were allowed to create."

"...Fannie sometimes hired lobbyists to work on a particular issue and then hired potential competing lobbyists just to sit on the sidelines and not work against it. Fannie also ginned up a philanthropic operation, building support by giving away money."

"There is Newt Gingrich lauding Fannie Mae at a corporate event. There is Larry Summers bullying his Treasury staff to water down a report critical of Fannie."

"Look at Rep. Barney Frank, responding in 2005 to the question of whether the government's push to increase home-ownership rates might result in people buying more home than they could afford and putting themselves in dire straits. The authors report: "Frank brushed off the questioner. 'We'll deal with that problem if it happens,' he barked.""