Friday, August 26, 2011

The Night Beat Summer Reading Program: Reckle$$ Endangerment by Gretchen Morgenson

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
I was going to call this post Gretchen Tans Freddie's Fannie, but I thought better of it and went with the generic sounding title. I heard about this book on Rush Limbaugh's radio show and immediately got on the waiting list. Imagine a book written by someone who works at the New York Times that actually gets it right. Or at least mostly right.

Gretchen Morgenson traces the financial collapse of 2008 back to its original source. No, it wasn't Bush. Before 2009 I always thought the word Inheritance was a good word. Obama has attempted to disparage the word. Obama INHERITED an unemployment rate of about 6%. It is now officially 9%, but is probably about twice that. The thing about inheritances is you only get that once. After that it's on you. Say I inherited a million dollars, but then went on and rang up two million in debt. I can't say I inherited the debt. I didn't have to do anything stupid. I could have invested it and created five million.

No, the seeds of the crisis went past Bush all the way back to Bill Clinton. In 1994 Clinton created the National Partners in Homeownership. His goal was to raise the amount of homeowners in the U.S. from 64% to 70% by the Year 2000. Simple Math says that's only 6%. For that small an increase they decided to redefine the entire concept of real estate ownership so that owning a home was no more of a challenge than owning an iPod. And with a home being a throw away item, so was a mortgage. Not surprisingly with the rise of No Income Needed, No Down Payment Needed, Instant Approval, Mortgages you had people buy, and then when times got tough, walk away and default, without a second thought. After all, if nobody checked on your credit record, income, or anything else, you would always be approved for another mortgage, right?

Fannie Mae was at the center of this rush to make bad loans, and grew very profitable doing it. The two central players in this debacle were James Arthur Johnson, CEO of Fannie Mae form 1991-1998 (who went from there to Goldman Sachs, which helped in financing these mortgage backed securities) and his biggest cheerleader in the House of Representatives, Barney Frank (D-MA). Oh, Johnson's handpicked successor and scapegoat when it all came crashing down Franklin Delano Raines... Yes, you've got that right F.D.R. To a Conservative that alone should have been a tip-off that this was all a scam.

But, Just like the Bernie Madoff Ponzi Scheme, nobody ever thought that the gravy train would end. Congressman Frank was even quoted as saying "We'll deal with that problem IF IT Happens." Barney, the saying is "We'll cross that bridge WHEN (not if) we come to it." The arrogance of the Liberal.

Fannie Mae had a sweet deal. Exempt from State and Local Taxes, a $2.5 Billion Line of Credit at the Treasury, Lower Borrowing Costs. Million Dollar Bonuses and Perks unheard of in the Private Sector. Life was good. Then there was the Government Mandate. If a bank wanted Fannie Mae to secure their loan by buying it so they could make more loans, they HAD TO APPROVE low income mortgages, which statistically had the highest probability of default.

This is where Reckless Endangerment falls short. Maybe it's because Gretchen works at the Times, but she has bouts where she rails against "Unfettered Capitalism". If there is even one mandate telling a company what it must sell or who it must sell too, that is a fetter. When you had to put down 20% of the house down, show that the payment would not be more than 28% of your income, and that your entire debt (including housing) wouldn't be any more than 36% of your income, not many people qualified and there were a lot of renters. On the flip side, there weren't many defaults, and those who did felt as if they had a scarlet letter on them.

Back to Fannie Mae. Not only would them paying taxes in Washington, DC have given the District $300 Million in 1995 alone--Another example of how it is the Government who never gives Back to the Community--But the amount they had to set aside to cover bad loans was only 2.5% of the Amount Loaned, compared to 10% for a Private Bank or Lender. Any CPA worth half his salt could tell you that was a recipe for disaster.

Though a few Republicans (what I would Call RINO's) were under Fannie's Spell, the clear majority of supporters and enablers had a big D next to their names. Even our President Obama. After all, he hired Johnson to help him pick a VP Candidate.

Though the book has its faults, like not understanding that Enlightened Self-Interest is not selfishness. And yes, it is true that a company left to its own devices will not act in a self destructive way and its self interest will help all involved. The only problem with that is that when a government mandate is thrown into the works, it usually means the company has to act against its interests. Let's forget about Low income housing for a second. Forcing a health insurance company to cover yoga classes or hangnail treatment is just as bad. You can't cover everything without charging more. Then people complain that their premium is too high. Well DUH. 

Just like any business, Insurance or Banking or Retail, the aim is to make money. The only way to do it is to spread the risk around. While risk in retail may be limited to the product, allowing them to charge everyone the same price, other things are not so cut and dried. An auto insurance agency that sees you are getting into repeated accidents will raise your rates compared to a safe driver. Is it fair? YES!! The question is not why can't I get the same rates as the good driver. The question is how can I become a good driver?

I'm rambling, and this is my most wordy post in a while, but this book hit a nerve, and I like that. You should read it. Make Your own Conclusion. I think you can tell that in all things I will side on the side of Capitalism. The Biggest fictions in our society are that of Unfettered Capitalism and Price Gouging. On the latter, remember supply and demand. In a disaster their is a greater demand for some things than would be needed otherwise, and the supply, if it comes from elsewhere, needs to be increased. Prices go up, sometimes dramatically. Price Gouging exists only in the mind of a Democrat Politician. It's simple supply and demand. Unfettered Capitalism has never been tried. If we had it we wouldn't have BILLIONS of BUREAUCRATS in Washington working for various regulatory agencies. Now if we got rid of those agencies (Which Will NEVER HAPPEN), then we could see Unfettered Capitalism. Until then, NO. We're not even close.

I've got to end this post. For all its flaws I will give Reckless Endangerment by Gretchen Morgenson 4.5 Emeralds. It is an eye opening book, and it busts the myth that this is Bush's Recession. That's priceless from someone on the Times payroll. Until Next time, I am Awaiting Your Reply.