The louder he talked of his honor, the faster we counted our spoons.
–Ralph Waldo Emerson
“The louder they talked about the disadvantaged, the more money they made. And the more the financial system tottered,” adds George Will in a column headlined “Burning Down the House.”
The column is about a “scalding” new book Reckless Endangerment, by Gretchen Morgenson, a New York Times columnist, and Joshua Rosner, a housing finance expert. The book is about James Johnson “an emblem of the administrative state that liberals admire.”
You probably know Johnson’s name because he used to be chairman of Fannie Mae, where he raked in a lot of money and harmed the country. He is also a Democratic insider with ties to the Obama administration. He was part of a big campaign to ensure that everybody could be a homeowner, which is a great goal-but only if people can afford to own houses.
The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”
In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.
There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-
income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could offload risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40?billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160?billion.
Fannie Mae became perhaps the most powerful financial institution in the world. Its power was built on the implicit understanding that the government backed its loans. Morgenson and Rosner report that Johnson and others at Fannie Mae began to manipulate the company’s financial sheets to provide enormous bonuses for themselves. Johnson got $100 million over nine years.
This is an important column, but I especially wanted to cite it because it praises June O’Neill, an economist and debunker of the so-called gender wage gap who is no stranger to Inkwell readers:
Morgenson and Rosner find few heroes, but two are Marvin Phaup and June O’Neill. These “digit-heads” and “pencil brains” (a Fannie Mae spokesman’s idea of argument) with the Congressional Budget Office resisted Fannie Mae pressure to kill a report critical of the institution.
“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations – of families, endowments, etc. – than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.
Morgenson and Rosner report. You decide.