Frank Partnoy is the George E. Barrett Professor of Law and Finance at the University of San Diego and is author, most recently, of The Match King: Ivar Krueger, The Financial Genius Behind a Century of Wall Street Scandals.
Private financial firms overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities. Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank.
Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon boldly and passionately asserts that the risk-taking of Fannie Mae and Freddie Mac was a major element in causing the housing bubble. This claim is not substantiated by persuasive analysis or by any hard evidence in the book. Yet it is being used by politicians and pundits to soften criticism of private business and by lobbyists and others who would water down the new regulations passed by Congress under the Dodd-Frank Act.
A debate has erupted anew in Washington over whether Fannie Mae and Freddie Mac caused the credit crisis of 2007 and 2008. Their critics claim that these two Government Sponsored Enterprises (GSEs) deserve a lot of the blame because they encouraged mortgage lending to low-to-middle-income Americans, a goal that Congress required and Bill Clinton advocated. The debate, which faded after a brief fluorescence in 2008, has been revived by a new book, Reckless Endangerment, by the respected New York Times reporter Gretchen Morgenson and the dogged financial analyst Josh Rosner.