TOPICS > Economy

Protecting Its Fannie: How Mortgage Giant Primed the Bubble, Covered Its Assets

July 1, 2011 at 12:00 AM EDT
As part of his Making Sen$e series, Paul Solman reports on the new book, "Reckless Endangerment," which argues that for the past 20 years, Fannie Mae, a government-sponsored enterprise that increases money for homeownership, pursued profits for itself and bought risky loans that inflated a housing bubble that eventually burst.

JEFFREY BROWN: Next, how a mortgage giant with a public purpose helped inflate the housing bubble in the lead-up to the financial crisis.

It’s the subject of a new book. And NewsHour economics correspondent Paul Solman has the story, part of his continuing reporting Making Sense of financial news.

PAUL SOLMAN: The Washington home of Fannie Mae. This so-called government-sponsored enterprise and its cousin, Freddie Mac, increases money for homeownership, buying home loans from banks and packaging them into securities to sell to investors everywhere.

A new book, though, “Reckless Endangerment,” argues that, for the past two decades, Fannie pursued profit for its own sake and bought riskier and riskier loans that pumped a housing bubble bound to burst.

When it did, Fannie and Freddie failed. A federal bailout that has cost some $130 billion followed.

We talked to co-authors Gretchen Morgenson, a Pulitzer Prize-winning reporter, and finance analyst Joshua Rosner, outside Fannie’s headquarters.

So, the main culprit of your story is Fannie Mae, right behind you there. Why Fannie Mae?

GRETCHEN MORGENSON, “Reckless Endangerment”: It was a primary mover, a first mover in the process to relax lending standards, to go downhill into the sort of subprime morass that really got us into trouble.

And it was able to wrap itself in the American flag of homeownership and capitalize on its great and lucrative government subsidy.

PAUL SOLMAN: How does the government subsidy work? I mean, it isn’t the government actually giving money to Fannie Mae, is it?

JOSHUA ROSNER, “Reckless Endangerment”: Fannie and Freddie were given a lower — a lower borrowing rate in the markets by investors, who always assumed that they were government-guaranteed.

PAUL SOLMAN: Lower borrowing rates because those investors who lent Fannie money to buy mortgages believed, if it couldn’t pay them back, the government would.

And, in fact, the government did, after Fannie’s failure in 2008. Those lower rates amounted to a $6 billion subsidy, say the authors, much of which went toward enriching Fannie Mae’s shareholders and executives, and lobbying against constraints.

JOSHUA ROSNER: They generally squelched oversight with all — always with the same tactic. You get the realtors, you get the home builders, you get community groups, you get community activists to say, if Fannie and Freddie are constrained, it will have a negative impact on homeownership rates.

PAUL SOLMAN: Right across the street, the James A. Johnson Housing and Community Development Center, named for the man who, say the authors, built Fannie’s empire.

GRETCHEN MORGENSON: James Johnson was the chief executive of Fannie Mae from 1991 to 1998, stayed on at the company in a high position in 1999. He was the architect of the company’s ability to capture Congress, to neutralize its regulator, to actually write legislation that would enrich its profitability.

JOSHUA ROSNER: The target and the goal was to make sure that people on Capitol Hill liked the company, saw the company as a face of housing, so that senators and congressmen could say to their constituents, look, we’re increasing homeownership, and you’re the beneficiary.

PAUL SOLMAN: Fannie Mae had no comment on any of the charges in the book. But its supporters say it was trying to do something almost all politicians believed in: making housing more affordable for more people, especially the less well-off. So, isn’t homeownership good social policy?

GRETCHEN MORGENSON: Not if you’re giving loans to people who can’t afford to pay them back, OK? And, so, if you are perverting the homeownership process because you are trying to enrich yourself, increase your profits, which Fannie Mae was absolutely determined to do, then that becomes a perversion of homeownership.

PAUL SOLMAN: And James Johnson himself, how did he do through all this?

JOSHUA ROSNER: Jim Johnson walked away with almost $100 million from his term at Fannie Mae, and stayed on as a consultant for about $600,000 a year. After pressure, he took cuts on that $600,000 to about $400,000 and gave up other perks, including a chauffeur.

PAUL SOLMAN: Former CEO Johnson, who wouldn’t speak to the authors, hasn’t returned our calls either, or, as far as we can tell, ever responded to the charges.

PAUL SOLMAN: On Capitol Hill, Morgenson asserted that Fannie had powerful allies, like Democrat Barney Frank.

GRETCHEN MORGENSON: In the early ’90s, when Congress was writing the legislation that would have a bearing on Fannie Mae’s regulator, Barney Frank was really very aggressively on the attack.

Whenever anyone would walk onto Capitol Hill and say, we should be careful about safety and soundness, let’s make sure the regulator is tough, let’s make sure that capital requirements are high, Barney Frank would be in there hectoring, shouting, “We don’t have a safety and soundness problem. We should care more about housing.”

PAUL SOLMAN: Rep. Frank rejects the charge, thinks Morgenson is getting back at him for his complaints about her coverage of the Dodd-Frank financial reform law.

REP. BARNEY FRANK, D-Mass.: I made the mistake of being very critical of her, I guess, to her editor, because I thought she misreported on the financial reform bill. So, she’s been very angry.

That simply isn’t true. I asked her for the evidence that I was constantly hectoring. There was one case, one hearing she cited. In fact, the bill in question that passed in ’92 was signed by George Bush. It was non-controversial. One version passed the House with only eight negative votes. The second was a voice vote.

She is simply describing a debate that never happened. And, as I said, I know there are reporters who think you should never criticize them, and they get even. That’s what she’s doing.

PAUL SOLMAN: Frank’s response to other charges in the book is on our website.

Others point out that the subprime boom was stoked by private banks, Fannie and Freddie latecomers to the debacle. And the authors are quick to say that both Democrats and Republicans on Capitol Hill were fanning the Fannie Mae flame.

Former House Speaker Newt Gingrich, for instance, appeared at the opening of one of the partnership offices Fannie Mae set up around the country.

GRETCHEN MORGENSON: Newt Gingrich was there on the scene of one of these ribbon-cutting ceremonies in Atlanta, you know, crowing about the contributions that Fannie Mae had made.

JOSHUA ROSNER: Fannie was shrewd enough to understand that, in order to push their agenda on Capitol Hill, they needed to be supported by economists as well. And so they started a series of papers where they would hire notable conservative economists like Glenn Hubbard, or progressive economists like Joe Stiglitz and Peter Orszag, to justify various aspects of Fannie and Freddie’s mission or dispel concerns about their safety and soundness, and really used those as lobbying points on Capitol Hill.

PAUL SOLMAN: Joe Stiglitz responds, “It was more than a decade ago. Had we discovered a problem, we would have raised a strong warning. No constraints on our work and our ability to disseminate our results were imposed. Some time after that, Fannie Mae did lose its way, forgot its mission.”

We have posted the rest of the Stiglitz response online. Hubbard and Orszag declined to respond on the record.

In writing this book, what surprised you the most?

JOSHUA ROSNER: We started the process of resolving the crisis talking about a troubled asset relief program, getting the troubled assets off the bank balances sheets. We haven’t done that. Most of these assets still sit on the bank balance sheets. Most of them remain there at inflated values. And there’s still no real interest in lifting the kimono, so the public and investors have any real understanding of what it is they’re invested in or what the systemic risks are.

PAUL SOLMAN: But we don’t want to lift the kimono, because then banks might have to write down their assets, and we could find ourselves back where we were at the depths of the crisis of 2008.

JOSHUA ROSNER: Which means that we have a Kabuki theater, where some future administration, future legislators, and future regulators are going to have to resolve a crisis which hasn’t fully been dealt with yet.

PAUL SOLMAN: A metaphor that may be unfair to Kabuki theater, but suggests the obscurity in which the funding of housing in America and Fannie Mae came so disastrously to operate.