Saturday, November 19, 2011

What Did You Learn From the Real Estate Meltdown?

I just finished reading Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. The authors make a strong case that the recession and real estate melt-down was a simple case of greed at many levels, and they feel that most of the really bad guys are still known to us and today are very rich.

They trace the beginnings of our real estate collapse to the mid-1990s, beginning when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The governmental support was in fact a subsidy to increase home ownership, which enriched Fannie and it's C.E.O., James A. Johnson. So far so good but then the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. And over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated just as lavishly.

To entrench Fannie’s privileged position, Johnson and Raines didn't keep all the largesse, they channeled some off to members of Congress—contributing to campaigns and handing out patronage positions to relatives and former staff members. Fannie paid academics to do research showing the benefits of its activities and playing down the risks, and shrewdly organized bankers, real estate brokers and housing advocacy groups to lobby on its behalf.

American taxpayers were unknowingly handing Fannie billions of dollars each year. Countrywide Financial (now a failed division of Bank of America) became Fannie’s single largest provider of home loans and the nation’s largest mortgage lender. Countrywide abandoned most traditional lending standards altogether, and even doctored loans to make applicants look creditworthy, while generating a fortune for its founders.
Meanwhile, Wall Street banks received fat fees underwriting the securities issued by Fannie and Freddie, and even more money providing lenders like Countrywide with lines of credit to expand their risky lending and then bundling the mortgages into securities they peddled to their clients. Wall Street loved the charade because it was so profitable. Later as the market dumped, Goldman Sachs bet against the bundles — making huge profits off the losses of its own clients on the very securities it had marketed to them. Eventually, of course, everything came crashing down.

Robert Rubin, when he was the Treasury Secretary, pushed for repeal of the Depression-era act that had separated commercial from investment banking—a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with Citibank. Then after leaving the Treasury, Rubin became Citigroup’s vice chairman, and over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design.

With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank cut back its oversight of Wall Street operations. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when that firm created many of its most disastrous securities.

As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout, which just to Fannie and Freddie has cost the American Taxpayer $141 Billion. ($141,000,000,000)

Today James Johnson is a rich and respected member of Washington’s political establishment (although he was forced to resign from President-elect Obama’s advisory team after the press got wind of his cut-rate personal loans from Countrywide). Franklin Raines retired from Fannie with a generous bonus. Henry Paulson became a fellow at Johns Hopkins. Robert Rubin is affiliated with the Brookings Institution. And Timothy Geithner remains Obama's Treasury secretary.

All told, it appears we have learned remarkably little from the real estate meltdown. Fannie and Freddie, are now wards of the state, currently back more than half of all new mortgages, and their executives are still pocketing fortunes. Wall Street’s biggest banks are larger today than they were when they got into trouble, and the executive pay packages are just as generous.

But the rest of us have paid dearly.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. Reach him at: or at

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