October 5, 2011: Bob Brinker Beehive Buzz Guest Writer

October 5, 2011........................................................................................(comments)

This great review and commentary was written by a guest-author who posts here with the pen-name,  FrankJ:

"The mortgage meltdown and resulting financial crisis, spawned a large number of books on the subject.  Some analyzed the causes and some looked at  how the fix was put in place:  who won and who lost.  Bob Brinker has hosted a number of these authors on his show.   To me, with a few exceptions, this parade of authors grew tedious and I wondered just how long Bob would keep returning to this subject area for the show’s third hour.     

I recently finished reading Reckless Endangerment by Gretchen Morgenson and Josh Rosner, published in 2011.  Morgenson was a third hour guest earlier this year.  The subtitle is an apt description of what the book is about:  How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon – this book is solidly in the group dealing with the causes.  And to borrow a phrase from Bob Brinker, the book and the co- authors, belong “at the head of the class.”

To put this book in perspective, it could be contrasted to Andrew Ross Sorkin’s book, Too Big to Fail,   another book and author featured in Bob’s third hour.  On the strength of the book being made into a movie, Sorkin appeared twice as a guest.  It has been a while since I read that book, but I remember it as a moment-by-moment account of the efforts made to save some of the major Wall Street firms.  It addresses the causes, sure, but much of the content of this book deals with personalities, drama, deals, hubris, stupidity and suspense that unfolded in 2008. 

Reckless Endangerment is not the stuff of movies, but it is a detailed, thorough and well-researched analysis of the causes of the financial crisis of 2008.  Morgenson writes in the Introduction: 

This is not the first book to be written about the epic financial crisis of 2008 and neither will it be the last.  But Josh and I believe that Reckless Endangerment is different from the others in two important ways.  It identifies powerful people whose involvement in the debacle has not yet been chronicled and it connects key incidents that have seemed heretofore unrelated.   

The reader gets a preview for how the story will unfold, when the Cast of Characters is presented prior to the Introduction.   This cast grouped into these categories:

• ·        Fannie Mae and Friends
• ·        Doubters and Those Who Pushed Back
• ·        Subprime Lenders and Their Enablers
• ·        Feckless Regulators

I think most of those who have been paying attention these last several years are aware that Fannie Mae and Freddie Mac were a large part of the problem;  that Wall Street enabled the subprime boom even after there was evidence the bubble was about to burst;  and that regulators were outclassed, or worse, controlled by those they were supposed to regulate.   

I suggest that the stories of “Those Who Pushed Back” have been under reported and to their credit, the authors of this book devote space to them.   

One of these heroes is Marvin Phaup, who, in 1996, was a deputy assistant director of the Congressional Budget Office.  He set out to examine Fannie Mae’s claim that  they “…served the American public by passing along to borrowers all of the cost savings the company received from its government association.”    Mr. Phaup examined the amount of the subsidy they received as a government sponsored entity, and, how much of the savings they actually passed on to borrowers. 

 Phaup found that Fannie and Freddie’s  borrowing costs were lower because investors assumed they would be bailed out by the government.  For the year 1995, he estimated they benefited to the tune of $7 billion.   Did they pass on all of these savings?  No, they passed along  two-thirds, keeping one-third for themselves.   To Phaup and the CBO, this explained Fannie’s outsized executive salaries, aggressive lobbying efforts, charitable contributions, and penchant for keeping academics on retainer – ready to publish studies in support of its role in the mortgage markets. 

In May of 1996, when the report was finished, Fannie Mae demanded a meeting with the CBO.  Franklin Raines  and Robert Zoellick (top execs with Fannie Mae) did not refute the report’s findings but insisted that it not be published.  (If the name Zoellick sounds familiar, it is because he is now the head of the World Bank…these people just don’t go away).   

Marvin Phaup’s boss and head of the CBO, June O’Neill, is another hero.  In response to Fannie’s demands,  she told them it would be published as written.   One month later, O’Neill was in the crosshairs of the House Banking Subcommittee on Capital Markets, when she presented and defended the report.  She had to sit through questions and statements from members of the subcommittee, provided by Fannie Mae.  Congress did not act on CBO’s suggestion that they consider privatizing Fannie and Freddie.

On finishing the book, I was struck by how many people who were involved as schemers, enablers, or were just asleep at the switch, are still involved in politics and policy.  In the authors’ words, “…we are disturbed that so many who contributed to the mess are still in positions of power or have risen to higher ranks.  … A system where perpetrators of such a crime are allowed to slip quietly from the scene is just plain wrong.”     

This point is driven home in the last few pages, where the key players in the events leading up to the 2008 crisis are listed, along with what they are doing as of late 2010. " 

Honey here: Thank you very much FrankJ! 

My family member and her husband, who is an amputee, both completed the Canada IronMan last month.  Yesterday, they ran a half-marathon together. This is a great accomplishment in light of the long road Jeff took to recover and get to this point. Having someone like her has made the difference for him (I admit to some bias in thinking she is wonderful) :)

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