'I Really Have No Recollection': Fannie Mae And Barney Frank's Roles In The Financial Meltdown
This is an adaptation from "Reckless Endangerment", an exploration of the origins of the recent financial crisis, by Gretchen Morgenson and Joshua Rosner. The book was published Tuesday by Times Books. This excerpt examines how Fannie Mae, the government-sponsored mortgage giant, took on greater risks in the years leading up to a taxpayer bailout -- under the guidance of its CEO, James Johnson, and with the support of Congressional defenders, like Barney Frank. This is the last of three excerpts.
In the summer of 2008, as the financial crisis gathered steam, Barack Obama, the putative Democratic presidential nominee, began the crucial search for a vice presidential candidate. The man he chose to lead his effort was James A. Johnson, the former chief executive of Fannie Mae and one of the most powerful men in Democratic circles in Washington.
But on June 11, before Johnson had gotten far in the vetting process, he resigned from the committee. News that he had received $7 million in cut-rate mortgage loans from Countrywide Financial prompted the resignation.
It was a rare trip-up for Johnson, a consummate Washington insider who had advised John Kerry in his run for the presidency, run Walter Mondale's failed presidential bid and enjoyed, as he still does, a prestigious post as a director at Goldman Sachs.
But for many who knew Johnson and had watched him work his power base over decades in the nation's capital, it was paradoxical that a raft of sweetheart mortgages from Countrywide had driven him from the Obama A-list. Indeed, Johnson's ties to the burgeoning financial crisis were far greater than a few Countrywide loans. They arose from his eight years at the head of Fannie Mae, the mortgage finance giant that became taxpayer-owned in September 2008. Presiding over the company from 1991 to 1999 placed him front and center in the nation's homeownership push, an effort that would bring about the worst financial debacle since the Great Depression.
And yet Johnson has largely escaped scrutiny in the aftermath of the crisis. This is surprising because under his direction, Fannie Mae capitalized on its government ties, building itself into the largest and most powerful financial institution in the world. In 2008, when the colossus fell, it required more than $100 billion in taxpayer backing to keep it afloat. Fannie Mae became the quintessential example of a company whose risk-taking allowed its executives to amass great wealth -- but when those gambles went awry, the taxpayers had to foot the bill.
Beginning in the early 1990s, Johnson's position atop Fannie Mae placed him astride Washington and Wall Street, providing him with an extremely powerful policy tool to direct the nation's housing strategy. In his hands, however, that tool was a cudgel. With it, he threatened his enemies and regulators while rewarding his supporters. And, of course, there was the fortune he accrued.
Perhaps even more important, Johnson's tactics were watched closely and subsequently imitated by others in the financial industry interested in creating their own power and profit machines. Fannie Mae led the way in relaxing loan underwriting standards, for example, a shift that was quickly followed by private lenders. Johnson's company also automated the lending process so that loan decisions could be made in minutes and were based heavily on a borrower's credit history, rather than on a more comprehensive financial profile as had been the case previously.
Eliminating the traditional due diligence conducted by lenders soon became the playbook for financial executives across the country. Wall Street, always ready to play the role of enabler, provided the money for these dubious loans, profiting mightily. Finally, Fannie Mae's aggressive lobbying and its methods for neutralizing regulators and opponents were also copied by much of the financial industry. Regulators across the country were either beaten back or lulled into complacency by the banks they were supposed to police.
When Johnson became chief executive of Fannie Mae in 1991 the tone at the top of the company began to change from that of a sleepy utility to a political machine, according to people who worked there at the time. Under Johnson, Fannie's primary goal changed from buttressing the mortgage market when necessary to protecting -- at all costs -- the company's government ties and the riches that sprang from them.
Because the company was perceived to be at least implicitly backed by the government and would be rescued by it if necessary, Fannie Mae found it easier and cheaper to raise money than its competitors. And it routinely claimed that it passed along every penny of its cost savings to 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.
It wore the claim like a coat of armor, protecting itself from critics' slings and arrows. Only later would it emerge that the company kept billions of dollars -- at least one-third of the government subsidy -- for itself each year. Fannie dispensed this money to its executives, shareholders, and friends in Congress.
Fannie Mae and its sibling Freddie Mac were regulated by the Department of Housing and Urban Development. Not much of a watchdog, its oversight of Fannie and Freddie was a part-time arrangement -- only a handful of people at the agency dealt with matters involving the companies, and they juggled other duties as well.
But in the aftermath of the savings and loan crisis, the days of part-time regulators for Fannie appeared to be numbered. After paying out millions to clean up failed savings and loans, Congress was considering legislation to protect taxpayers from potential losses at Fannie and Freddie.
Confronting the reality that his company might soon be dealing with a much more energetic regulator and significantly higher capital requirements, Johnson went to war on two fronts. One attack was to be conducted very much in public. The program to advance homeownership was a quintessential "white hat" issue, in Washington parlance. Johnson's launch of a high-level public relations campaign to turn renters into homeowners would put a friendly face on Fannie Mae, an enigmatic entity that was neither bank nor mortgage lender and not quite a government agency either.