Reckless Endangerment | Gretchen Morgenson

Summary of: Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By: Gretchen Morgenson

Introduction

Embark on a journey into the world of greed and corruption that led to the 2008 economic disaster in this summary of Reckless Endangerment by Gretchen Morgenson. Discover how Fannie Mae and its CEO James A. Johnson transformed the mortgage market through relaxed lending practices and relentless lobbying efforts. The book also examines the rise of subprime lending, the consequences of mortgage-backed securities, and the dangerous consequences of deregulation in the financial industry. With a focus on the driving forces behind the housing bubble, the influence of the Clinton administration, and the complicity of Wall Street, this summary offers a compelling and insightful look at the devastating collision of ambition, greed, and corruption that resulted in economic Armageddon.

Fannie Mae’s Quest for Profits

In 1994, Fannie Mae, under CEO James A. Johnson, initiated the National Partners in Homeownership Agency to increase homeownership in the US. Fannie Mae relaxed requirements on down-payments, pursued untried ventures like mortgage insurance, retained lobbyists, and picked board members for political reasons. Johnson collaborated on the National Partners program, and private institutions eased their requirements for minority borrowers. Financial institutions pooled these subprime loans into mortgage-backed securities; however, concerned about these burgeoning subprime lenders taking too big a bite out of Fannie Mae’s pie, Johnson formed a business alliance with loan issuer Countrywide Financial. Under his stewardship, Fannie Mae established partnerships to maintain its influence and reach and became a major contributor to political candidates and organizations.

Fannie Mae’s Controversy

Fannie Mae, the government-sponsored enterprise, received criticism about not aiding American homeowners despite plowing in all gains towards the mission. The Congressional Budget Office (CBO) commissioned a report in 1995, stating that Fannie and Freddie only provided two-thirds of the billions in benefits to borrowers. Even though the director recommended reconsidering the special relationship with Fannie and Freddie, Congress chose not to privatize due to intense lobbying, and the subprime market continued to grow.

The Rise and Fall of Subprime Mortgages

In the mid-1990s, subprime mortgages became popular and Wall Street provided companies with warehouse lines of credit, allowing subprime lenders to make more loans. The 1999 repeal of the Glass-Steagall Act led to banks being able to manage both loan-making and securities-trading. Basel Committee on Banking Supervision lowered the “capital set-asides” on highly rated asset-backed securities from 50% to 20%. Ratings agencies like Standard & Poor’s, Moody’s and Fitch played a significant role in determining the “risk weights” banks assessed. Congress failed to change its oversight, even though lawmakers attempted to put the brakes on subprime mortgages.

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