There are roughly two kinds of books written about the financial crisis, much as there are two broad reactions to events that culminated in the implosion of 2008: There are those that view the events as an intricate historical tangle that needs to be combed through and understood, and that tend to see ignorance, failure, error and ambiguity as presiding deities over a systemic crisis. In this approach, few escape complicity; the game is to discriminate between greater and lesser evils. Then there are the books that make a more focused argument for an eternal war of good and evil, for a more political and more moralistic perspective. Terrible events presuppose the presence of terrible people and terrible decisions. Malefactors must be punished. All history culminates in disaster and has to be judged by that disaster. These books tend to feature powerfully simple arguments, full of characters wearing black hats and white hats. In the former category fall books as disparate as Andrew Ross Sorkin's "Too Big to Fail" and Bethany McLean and Joe Nocera's "All the Devils Are Here." In the latter case, we have Simon Johnson and James Kwak's "13 Bankers" and the long-awaited dissection of the mortgage crisis from The New York Times' Gretchen Morgenson and Graham Fisher & Co. mortgage analyst Joshua Rosner, "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon."
The title of Morgenson and Rosner's book fully captures the thrust of their argument. It's about ambition, greed and corruption -- not intellectual error, a failure of understanding, incompetence and cosmically bad luck mixed with greed and corruption. It's not about breakdown or failure, but "Armageddon." It is thus a highly moralistic tract that argues that the subprime crisis, literally and figuratively, stemmed from a group of powerful men who deliberately turned housing finance in the United States to their self-interested ends. It argues that the mortgage "bubble" was at the heart of the crisis, and that other issues from easy Federal Reserve money to trade imbalances to globalization to overwhelming systemic complexity to financial innovation were either secondary or beside the point. This point of view allows Morgenson and Rosner to simplify the complex evolution of mortgages to what they view as an illicit takeover of the business and recast the two big mortgage government-sponsored enterprises, Fannie Mae and Freddie Mac, as the necessary ignition of implosion (they don't explain how the crisis spread internationally).
Such an argument that focuses so tightly on the GSEs is inevitably political in an acutely partisan way. The GSEs, with a few exceptions, were developed, nurtured, protected and encouraged by Democrats. Housing has long been a Democratic issue. And the argument that the American dream somehow involved homeownership was most compelling to Democratic constituencies (although any number of GOP pols climbed aboard as well). Indeed, while they take any number of shots at President Clinton -- they refer to him continually as William Jefferson Clinton, with barely contained sarcasm -- and Barney Frank, their primo target is Jim Johnson, the former Mondale chief of staff and campaign manager and Fannie Mae chief. There is a good case to be made here that Johnson was the architect of the hegemonic Fannie Mae, which used its government affiliation (and accompanying subsidy) not only to build a powerful lobbying and political operation but also to enrich himself and his top executives. Fannie Mae in turn is viewed as the heart of the web of ties that reshaped American homeownership into such a dangerously inflationary phenomenon. Johnson, who left Fannie Mae in 1998, has been criticized in the past for his role at the GSE, but until now he has not been characterized as the prime villain of the affair (the pair view this failure as a scandal too), well behind his pal Angelo Mozilo of Countrywide Financial or Alan Greenspan or more wildly, Goldman, Sachs & Co. Indeed, while Greenspan actually gets credit here for warning about the GSEs, Morgenson and Rosner cut Johnson and his policies no slack. Even gone from Fannie, Johnson remains a dark influence, operating within a web of board relationships and institutional sinecures (the Kennedy Center, Brookings, and, uh-ho, the Goldman board). In the end, "Reckless Endangerment" seems to make a Reaganite argument for no government role in housing.
This is a book of many facts but not one that exactly screams subtlety. (In fact, in polemics like this one, subtlety is viewed as the devil's handmaiden.) Morgenson and Rosner write with heart-pounding urgency and a kind of adjectival telegraphese where Tim Geithner becomes the "relaxed regulator" and Mozilo "the hotheaded butcher's son." Johnson hobnobs with "powerfully placed friends" and "manipulates" and "buys off" Congress. Even worse, they argue, he showed other financial leaders how to do it; he's responsible not only for Fannie's influence machine, but for every other financial lobbying effort, including anything involving the banks; thus Johnson becomes ultimately responsible for "bailouts." But for all of that, they shrug off probing Johnson's psyche. They quote an unnamed "official": "Those trying to plumb Johnson's inner reaches found it to be 'like the Minnesota pastime of ice fishing.' " Meaning what? He was smooth and cold on top and watery and dark below? No, they add damningly, "The man was all politics all the time." Even worse, he was "ambitious," repeating over and over his dream of becoming Treasury secretary. Particularly at the start, they can't help but describe key events in the light of the lurid, if still distant, future. Johnson meets then-Fannie Mae CEO David Maxwell at a Washington cocktail party. "It was a fateful introduction that would not only bring immense wealth and power to Johnson but would also pave the way for the housing bubble years later." The pair can hardly let an incident pass without whispering that it was "fateful" and would lead to terrible ends.
That lack of nuance doesn't mean Morgenson and Rosner aren't broadly correct in many of their judgments. Over the past decade or so, the pair -- she in The New York Times, he as an analyst -- have done an enormous amount of reporting on this subject, though without endnotes it's impossible to know who did what and how. They have an incredible tale to tell, and if many of the details have been reported before, both by themselves and in books such as "All the Devils Are Here," that does not diminish the remarkable folly of the affair. The book improves once they move past preliminaries and clumsy foreshadowing and into the details of the evolution of Fannie and Freddie, the mounting insurgency against them and the rise of mortgage originators like Countrywide, Fremont and NovaStar. They hit many of the high spots and provide new reporting (at least to me) on some shadowy areas, particularly the tug-of-war between the GSEs, regulators and Congress. Johnson and Fannie Mae did cast an immensely long shadow in Washington; and the GSEs seduced many prominent politicians and regulators. There is, however, a touch of 20-20 hindsight in the withering scorn they pile on the notion of broadening homeownership. Right up to 2007-2008 when it came apart, many Americans believed in homeownership (many still do: recall protests when banks didn't lend during the crisis), which explains why so many crazy mortgages were sold. Simply arguing for the virtues of homeownership, like believing in the sanctity of the family farm, is not a sign of greed, corruption or complicity, particularly given that the future was not obvious until it was upon us.
There is about this book a sense that the pair have talked and written about the subject far too often over the years -- so they quickly skip to the good parts. Indeed, just as the story begins hurtling along, it hits 2007 and 2008, and they wrap it up in a perfunctory way, tossing in the failure of Bears Stearns, muttering about Dodd-Frank, taking a few more shots at Johnson, then exiting with a list of where some of the characters in this drama are today. The point seems to be that they're not in jail. You might have expected a little more thought from the pair as they wrapped this up.
Instead, you close this book wondering about the politics of all this. Throughout "Reckless Endangerment," Morgenson and Rosner seem to be using the rise of the GSEs as part of a larger critique against any government involvement in the economy. They rarely deal with the other side of the mortgage equation -- consumers and homeowners -- except to present them uniformly as victims of power plays from above; this resembles the belief that asset swings, or bubbles, are irremediably bad and sould be stamped out before they begin. Consumers were suckered by the "homeownership dream," by ARMs, by inflating values. But like children, the little guys share no responsibility for signing up for those mortgages or home equity loans. It's deeply patronizing.
One can agree that the GSEs did run off the rails in an attempt to create Johnson's beloved "private-public partnership" that was increasingly a corporate kleptocracy. But would the situation have been better if purely private institutions, like Countrywide or NovaStar or Citigroup, were allowed free rein in a mortgage market awash in cheap money? Their broad condemnation of the private-public arrangement, which is larger than just the GSEs and runs through much of American capitalism (look at healthcare), leaves one wondering what they would favor in its place. After all, many of the Republicans who long attacked the GSEs (including Greenspan) were also among the strongest proponents of deregulation. But the party label, which they toss around willy-nilly, explains very little. Clinton, Bob Rubin and Larry Summers joined Greenspan in various deregulatory positions, some of which were not wrong. The Bush administration pushed back on the GSEs but was clueless on other regulatory and economic questions. The real issue here seems to be a mix of ideologies and turf wars: Who gets the power, big private banks, big government or hybrid GSEs? Are they suggesting that we go back to a nation of deregulated small banks?
It's quite clear that the mixed provenance of the GSEs offered a fantastic opportunity for a shrewd player like Johnson to play both sides against the middle -- and create a kind of monster, which as time went on offered fewer and fewer real benefits. But beyond a warning about hybrid structures, what do Morgenson and Rosner really want? A world of large markets, big technologies and massive institutions would seem to demand some role for big government. To turn mortgages, say, over to the private sector would leave the field to Mozilo and Wall Street. To sharply rein it in would return power to the federal government, overseen by the same folks who enabled the S&L crisis and the subprime mess. Empower regulators and you create an undemocratic and prone-to-capture power center. Empower Congress and you get ambition, greed and corruption. Self-interest, ambition and conspiracy lurks everywhere. We're trapped in a maze, and Morgenson and Rosner offer no way to escape beyond the usual self-righteousness about speaking truth to power.
The way out should lie with the very little guys Morgenson and Rosner view as blameless, if unthinkingly passive chumps. The GSEs, the politicians and regulators operated so freely because finance is complex and the nation grew convinced there was a free lunch in the form of eternally appreciating real estate. At the heart of the phenomenon laid out in "Reckless Endangerment" is a vast structure of complex economics and finance that yesterday and today escapes the comprehension of most Americans. It operates in the kind of opaque bubble that a spinmeister like Johnson could shape to his own ends. The question is whether we can begin to peel back that opacity with the kind of electoral politics that values accountability and truth. Right now it doesn't seem very promising.