Revenge of the "Cheerleaders"

Perhaps they’re being facetious (yes, hobbits know what that word means), but Progressive pundits across the land are congratulating the Tea Partiers for their “victory” in protesting the successful passage of the Default Ceiling bill.

They’re patting our backs in condescension.  In the House, the bill passed 269-161 along a coalition of RINO Republican/Democrat party lines, with only the Tea Party candidates still opposing it.  There’s no balanced budget amendment.  There will be not one but two debt ceiling increases in the double trillions.  The president will be allowed to appoint his super committee to assume the task of discovering revenue (raising our taxes).  The extended Bush tax cuts will stand in for bona fide tax increases.  In short, as Emily Miller notes in The Washington Times:

“President Obama wanted three things from the debt-ceiling fight: trillions in new borrowing authority, status quo [business as usual] on spending and no more drama before his shot at re-election. He got everything.”

But even Republican pundits are patting our curly little heads for putting up good fight – and now we can go back to our hobbit holes and read fairy tales to our baby hobbits about how Pres. Obama and Congress saved the planet.  Or, you can go home tonight and read Reckless Endangerment by Gretchen Morgenson and Joshua Rosner.  Seriously, my good hobbits, read this book as soon as you can, while there’s still something left of our economy and still time to combat a second Obama presidency.

Morgenson is a New York Times business reporter.  But don’t let that worry you.  Rosner is partner at Graham Fisher & Co., an independent financial research consultancy firm.  He advises global policymakers and institutional investors on housing and finance issues.

Together, they tell the tale of the 2008 financial crisis.  The story begins a long time ago, in a culture far, far away in the 1930s with the signing of the Glass-Steagall act which regulated banks and mortgage companies.  At the same time, FDR created Fannie Mae (The Federal National Mortgage Association), a GSE (government sponsored enterprise) created to help out homeowners in crisis during the Great Depression.

In 1968, changed Fannie from a government agency into a partially private entity that issued common stock to public investors.  Fannie’s brother, Freddie Mac, was born in 1970.  Created by an act of Congress as competition for Fannie, Freddie was a public company like his sister, but with government perquisites (executive bonuses) for those who managed it.

Every story must have a villain, and the Sauron of this story is James A. Johnson.  He earned his master’s degree in public policy at the Woodrow Wilson School at Princeton University.  He joined the anti-war movement, attending a strategy session on Martha’s Vineyard.  He was Bill Clinton’s roommate at Georgetown University.  Johnson worked on the campaigns for Eugene McCarthy, George McGovern, and Walter Mondale.

Johnson’s ambition was to be White House Chief of Staff.  Only his candidate lost.  So he went into investment banking instead.  The head of Fannie Mae, David Maxwell, knew his institution needed political protection.  Officials were talking about removing Fannie’s lucrative benefits.  Maxwell needed a political black knight.  He asked Johnson to do some “analytical work…at Fannie Mae” to help chart its future course.

Johnson started calculating and stumping, while Maxwell prepared to retire, leaving Johnson as his heir apparent.  A master of political patronage and populist spin, Morgenson says, Johnson took the sleepy little mortgage lending utility to new heights, “protecting – at all costs – the company’s government ties and the riches that sprang from them.”

Investors were willing to put their stock in Fannie Mae because they had a false impression that if it failed, it still had the full-backing of the U.S. government.  “Fannie Mae could raise money from investors who were willing to buy its debt at lower yields than they would from fully private and riskier companies.”

She goes on to write, “Fannie Mae routinely claimed that it passed along every penny of its cost savings to the homebuyers in the form of lower mortgage rates.  This allowed the company to argue that any change in its status would result in higher housing costs for everyday Americans.”

However, the company was siphoning off billions of dollars every year.  Johnson used the money for influence peddling among politicians both Democrat and Republican (interestingly, it was only the Republicans who went to jail in the end – Barney Frank, Saruman to Johnson’s Sauron – came away unscathed and to this day indignantly defends Fannie and Freddie).

Housing for moderate and lower-income constituents provided enormous political capital for Congressional representatives and they eagerly took the bribes, attended the Fannie Mae ribbon cutting ceremonies, and prevented any legislation damaging to Fannie and Freddie from passing through the House.

Meanwhile, Johnson and his executives were becoming incredibly wealthy from all those government perquisites.  Johnson left Fannie Mae in 1998, along about the time Marvin Phaup of the CBO (Congressional Budget Office) began a fearless analysis of Fannie Mae’s finances.  Turned out, Johnson had made many friends among subprime lenders and their defenders, such Henry Cisneros, Clinton’s HUD Secretary, and regulators like Timothy Geithner of the Federal Reserve Bank, Alan Greenspan, chairman of the Federal Reserve Board, and Andrew Cuomo, another HUD Secretary under Clinton, and now governor of New York.

Then there are the big three ratings agencies:  Moody’s, Standard & Poors, and Fitch Ratings.  Not only did they not do their due diligence, but they were in bed with the subprime lenders, giving the institutions triple A ratings they didn’t deserve.  A good deal of money is to be made in the ratings business, as Morgenson observes.  The more mortgages a bank could sell to investors the better, and the ratings agencies had their share of cookies in the cookie jar.

Everyone needs to read this book as soon as they can.  These same ratings agencies have been threatening the United States with a visit from the Credit Fairy.  We should be asking ourselves, “Why?”  Beyond the obvious fact that we owe trillions in debt to foreign investors, we could pay the debt off.  What’s going on?

The Senate is jubilant over the passage of this debt ceiling bill.  No doubt, they’ll rush it express over to the White House, with an even more jubilant signing ceremony.  Morgenson and Rosner include photos in this financial tell-all.  One of those photos is from a 1999 ceremony with a group of cheerleading, chortling regulators, senators, and so forth, congratulating a beaming Pres. Clinton for killing the Glass-Steagall Act.