Pulitzer Prise winner James B. Stewart’s book, Den of Thieves, came out in 1992 and detailed the corruption in the financial and political underpinnings of the country. After reading it, one hoped they would never have to read another book on that topic, because the problems which caused it would be fixed. The book told the story of insider trading scandals involving Ivan Boesky, Michael Milken and other financiers and their Investment bankers, using junk (high-yielding, high-risk unrated corporate ) bonds to takeover companies. The book told a tale of arrogance and complacency among the Washington and Wall Street elite. Surely Washington and the American public would never let something like this happen again. The events described in the book took place place only twenty-five years ago, and a number of the principles went to prison. Milken, the mind and force behind the junk bond binge was sentenced to ten years in prison, though only served two. Ever since his release he has tried to refurbish, rejuvenate and rebrand his image to one of a financial innovator, and philanthropist, though he was permanently banned from Wall Street, and the fact remains he was a crook.
Unfortunately many new books describing the corruption and convergence of greed which resulted in the current economic debacle have been published because the country continues to flounder in a moral and ethical swamp. One of the best of the books describing the current economic upheaval , and destined to become a classic which graphically ties many seemingly unrelated facts together and gives the reader a true picture of what took place, is Reckless Endangerment (Times Books/Henry Holt & Co, 2011), written by Pulitzer Prize winning author, Gretchen Morgenson and financial and policy analyst, Joshua Rosner.
In the introduction Morgenson and Rosner write:
“Josh and I felt compelled to write this book because we are angry that the American economy was almost wrecked by a crowd of self-interested, politically influential, and arrogant people who have not been held accountable for their actions. We also believe that it is important to credit the courageous and civically minded people who tried to warn of the impending crisis but who were run over or ignored by their celebrated adversaries.
Familiar as we are with the ways of Wall street, neither Josh nor I was surprised that the large investment firms played such a prominent role in the debacle, But we are disturbed that so many who contributed to the mess are still in positions of power or have risen to even higher ranks. And while some architects of the crisis may no longer command center stage, they remain respected members of the business or regulatory community. The failure to hold central figures accountable for their actions sets a dangerous precedent. A system where perpetrators of such a crime are allowed to slip quietly from the scenes is just plain wrong.”
The economic derailment and disaster which left rail cars of debt and financial wreckage strewed around the world, jeopardizing governments, wiping out pensions and retirement accounts and poses a major problem for many years to come, did not occur overnight, and the authors take the reader back to the deregulation days of Nixon and Reagan, the abandonment of long standing controls, such as the depression era Glass-Steagall, under Clinton, the bubble inducing Fed under Alan Greenspan and asleep at the wheel regulatory system of the SEC, and the malfeasance of the powerful rating companies, Standard and Poor, Moody’s and Fitch, who didn’t do their job and were not called to task for it, and still maintain a stranglehold not only on business but world governments.
The economic decoupling of the economy had many facets, but two themes which seem to run through all the greedy strands were and are avarice and undue political influence and manipulation. A few people warned of what took place, tried to bring it to the attention of the politicians and regulators who could stop the train from heading over a bridge without foundation, but they were ignored, ridiculed and reassigned, and the politicians and regulators bought off. The authors give credit to these outstanding unsung heroes and in the process brutally detail how big money thoroughly corrupts the American political system.
The economic train wreck described in this book had many cars: Fanny Mae, created in 1938 and originally known as Federal National Mortgage Association, bought mortgages from banks which loaned money to home buyers. In 1968 the company changed from a Federal government agency into a partially private entity that issued common stock to public investors, though it maintained close government ties. In 1985 James Johnson, who had worked on Walter Mondale’s presidential and many other campaigns and was very politically astute and with many connections, and the college roommate of William Jefferson Clinton, joined Fanny Mae. David Maxwell was in charge of ran Fannie Mae when Johnson joined and ran the company as his predecessors had, recognizing the risks inherent in acquiring huge numbers of mortgages, all of which, of course, could not be investigated, but trusting to the loan originators to perform due diligence. David Maxwell retired in 1991, and Johnson took over and everything changed.
Morgenson and Rosner write:
“Although Johnson left Fannie Mae’s executive suite in 1999, his stewardship of the company not only opened the door to the mortgage meltdown, it virtually guaranteed it, former colleagues said.
Johnson’s many peers in the financial and homebuilding industries watched closely as he remade the government-created and sponsored Fannie Mae from a political lapdog of housing policy into an aggressive, highly politicized attack dog. In the meantime, he created enormous wealth for himself and his executives even as the company took on out-sized risks.
Fannie also funneled huge campaign contributions to supporters in Congress. Between 1989 and 2009, according to the Center for Responsive Politics, Fannie Mae spent roughly $100 million on lobbying and political contributions.
Johnson’s most crucial win was making sure that Congress was the company’s boss, not the Office of Federal Housing Enterprise Oversight (OFHEO), a regulator created in 1992 to watch over the company. With Congress as his de facto overseer and with millions of dollars to hand out to lawmakers, Johnson could be confident his company would always receive the support it sought on Capitol Hill.”
Plenty of blame gets detailed by the authors, and the crisis would have been big, but it became immense when Wall Street’s alleged Investment Bankers brushed off a criminal trick pioneered by Michael Milken, and poured almost untold sums of money onto an already combustible situation. Milken realized many of the junk takeover bonds were absolute garbage, but others where actually of good quality and would ultimately be paid off and with a very high interest rate to the bond holders. What he did was mix the good material with the garbage, and marketed units of this toxic mix. This is the same thing the bankers did with good mortgages and mortgages that couldn’t help but default. This poisonous mixture was sliced and diced and marketed worldwide and damn near brought down the entire worldwide finances, and this with the connivance of the Fed, Washington’s corrupt politicians, regulators asleep at the wheel, rating and insurance companies willing to go along with anything as long as it generate large fees.
When this train racing at high speed towards economic and financial collision derailed and strewed its smoking toxic waste throughout the world to bring the economic world almost to complete collapse, one would think the perpetrators of this would be charged, and sent to prison as was Milken and his conspirators in crime, and the companies responsible for this would be broken up, or go down in flames as did Drexel, Burnham, Lambert after Milken milked it. This did not happen. The companies were bailed out with US taxpayer money because they were too big to fail, and now, with all the money poured into them by corrupt politicians universally ignoring their outraged electorate, the companies are bigger. Principles in this train wreck, like Timothy Geithner who helped headed the powerful New York Fed at the time and was in a position to rein in the Wall Street invest banks, is now Secretary of Treasury, and James Johnson, arguably the engineer of the wreck, sits on the board of Goldman Sachs who towards the end shorted the sliced and diced mortgages, instruments of financial destruction, they urged their clients to purchase.
With sickening detail, Morgenson and Rosner show how corporate boards are corrupted by various officers sitting on the boards of different companies, and how they are interlaced with the easily bought off Washington politicians in a world of I will scratch your back if you’ll scratch mine. This well written and researched page-turning book is a must read for anyone interested in understanding and changing the rotten system which now exists.