Click Here To Purchase Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Authors: Gretchen Morgenson and Joshua Rosner

Publisher: Times Books (Henry Holt and Company LLC)

ISBN: 978-0-80509120-5

Morgenson is a business reporter and columnist for the New York Times and in 2002 she was awarded the Pulitzer Prize for her “trenchant and incisive” coverage of Wall Street. Rosner is a management director at the independent research consultancy Graham Fisher and Company and advises regulators and institutional investors on housing and mortgage finance issues. They have put their heads together and have come up with a stupendous indictment of some very powerful people whose involvement in the 2008 economic breakdown is mind boggling. In addition, these two authors have been able to connect key incidents that were overlooked by others in trying to connect all of the pieces to the disastrous puzzle. According to their introduction, they state that they have seen many juicy financial scandals in the past “but none of the scandals and financial improprieties we experienced before felt nearly as momentous or mystifying as the events that culminated in this most recent economic storm.”

To start the ball rolling, Morgenson and Rosner take aim at the corrupt shenanigans that transpired within the government sponsored enterprise, Federal National Mortgage Association, commonly known as Fannie Mae, and they vent a scathing attack at its chief executive officer, James A. Johnson.

Fannie Mae was created in 1938 as part of the New Deal and its principal purpose was to expand the secondary mortgage market by secularizing in the form of mortgage back securities allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on thrifts.

In 1992 Johnson capitalized on the philosophy and the politicization of credit that advocated that it was important that all Americans should have the opportunity to own their own homes- it mattered little if they could afford a home.  As a result, lending rules were relaxed as bankers knew they could enter into risky loans and off-load them to Fannie Mae and Freddie Mac. Johnson also made sure that any legislation that would prove to be detrimental to Fannie Mae and his own interests would be stifled by his bullying tactics and no-holds barred approach to lobbying and silencing critics. For Johnson all that mattered was that this is a great opportunity for Fannie Mae to jump in and reap unbelievable profits that would fatten his pocketbook and those of his executives. Johnson also rhapsodized about Fannie-Mae as the All-American good-deeds-doer, as the authors mention. However, we all know how this ended with the American Government having to step in and take over a bankrupt institution.

Although considerable ink is devoted to Fannie Mae and Johnson, the authors also rake over the coals the Long Term Capital Management debacle that used a speculative hedge fund employing absolute-return trading strategies as fixed-income arbitrage, statistical arbitrage, pairs trading and combining these with high leverage. In the late 1990s the fund failed and had to be bailed out by other financial institutions under the direction of the Federal Reserve. Guess who wound up paying the bill for this?

Next on their hit list is the backing by the Federal Government of the risky practices of many of the banks and not insisting that their capital requirements be increased. As pointed out, instead of reining in on financial institutions in areas that could result in losses, Fed officials loosened them. The Fed even went so far as relying on the self-regulation of the banks and their risk-management teams. What stupidity and foolishness!

Not to be left out are the rating agencies that likewise had a very important role in the economic melt down when they did not understand the composition of the complex asset-backed securities that were being peddled to investors by Wall Street. According to the authors, ``if the rating agencies were doing excellent work on behalf of the banks, Fannie Mae and Freddie Mac, they continued to do shoddy work for investors and taxpayers. ``

Other financial scandals and improprieties that are delved into pertain to Countrywide Mortgage Investment that was taken over in 2008 by Bank of America in a kind of shot-gun wedding transaction, several rogue operating mortgage lending companies that were involved in fraudulent loan applications, the SEC and their asleep at the switch behavior, and questionable collateralized debt obligation instruments.

Last but not least are the political actors in all of this scandal that played just as an important role as any of the above. It was they who succumbed to not passing regulatory legislation that would have put the brakes on all of the disgusting and irresponsible behavior of the various institutions.

As Rex Murphy of Canada's National Post summed it up in his article of July 16^th, 2011: “The real story of Reckless Endangerment is more a story of democracy corrupted than it is a story of financial fraud.” (National Post- July 16^th, 2011).

Just as the present debate lingers on about the debt ceiling in the USA, politicians are more interested in their own self interest than the welfare of their constituents. What a shame!