The Magazine

Guilty Men

The political origins of the meltdown.

Jul 25, 2011, Vol. 16, No. 42 • By CHRISTOPHER CALDWELL
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The preferred method of the Clinton administration for meeting these goals was the public-private partnership. When they work well, such partnerships spread the costs of government to those who most benefit from it, and they lower taxes. But the experience of the past 20 years is that they don’t work well. Mostly they give plutocrats the power to make law. Johnson wound up with unseemly links to certain private companies. Since 1999, he has been on the board of Goldman Sachs, which, back in the 1990s, designed an investment vehicle that would allow Fannie’s executives to shift income from year to year to meet bonus targets for earnings per share.

That is part of the reason why, according to Morgenson and Rosner, “[y]ou could predict what Fannie’s earnings-per-share would be at year-end, almost to the penny, if you knew the maximum earnings-per-share bonus payout target set by management at the beginning of each year.” Between 1998 and 2003, Johnson’s successor Franklin Raines made $90 million, $52 million of which was tied to these incentive targets.

Angelo Mozilo, the aggressive CEO of Countrywide Financial, the mortgage giant that swooned, bankrupt, into the waiting arms of Bank of America in 2008, called Johnson a man who “could cut off your balls and you’d still be wearing your pants”—doubtless a compliment in Mozilo’s book. By 2007, Countrywide was supplying 28 percent of Fannie’s loans. It was for having taken a friends-of-Angelo loan from Countrywide at a preferential rate that Johnson had to leave the Obama campaign in the summer of 2008. Others who got these loans included the late Richard Holbrooke (Johnson’s former lobbying partner), senators Christopher Dodd, Kent Conrad, and Barbara Boxer, former Health and Human Services secretary Donna Shalala, and George W. Bush’s Housing and Urban Development secretary, Alfonso Jackson. 

There is certainly plenty of blame for both political parties in the finance crisis that grew out of the subprimes. But Johnson was an extremely partisan Democrat and for that reason, the unraveling of Fannie is largely a Democratic scandal. Fannie’s most strident defenders were Democrats, and they include the two authors of the most recent financial reform bill, Dodd and Rep. Barney Frank, whose ex-boyfriend Herb Moses Fannie hired while they were dating. Almost all of Fannie’s foes were Republicans. There were a couple of exceptions: Sen. Christopher Bond of Missouri was a ferocious defender of Fannie Mae, and former Utah senator Robert Bennett was one of the main beneficiaries of its favors. (You may applaud or deplore the ouster of Bennett by Tea Party Republicans last year, but they had their reasons.)

Johnson’s priorities survived him, and Fannie was not alone in using housing policy as a means of social engineering. Housing and Urban Development secretary Andrew Cuomo pressured Fannie to buy more subprime mortgages. A 1999 HUD study faulted Fannie for disqualifying borrowers with “low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” Cuomo threatened fines if such borrowers were not given more loans. In 2003, California representative Maxine Waters called for eliminating down payments from mortgages altogether. What sounded insane in 2003 was industry practice in 2005.

Gretchen Morgenson’s columns are as bold and well-informed as anything in American financial journalism, and Joshua Rosner is one of the rare analysts who saw, a decade ago, where subprime shenanigans would take us. But one wishes this book were better. The two authors’ contributions do not mesh. There is a hundred pages on Johnson, a hundred pages on Fannie Mae after Johnson, and then a hundred pages about topics, interesting in their own right, that the authors never manage to slot into an overarching narrative: the history of rating agencies’ role in mortgage securitization, the story of the disreputable mortgage originators NovaStar and Fremont, the shocking account of how Johnson, Mozilo, and former HUD secretary Henry Cisneros colluded to build a lot of moderate-income housing with zero-money-down loans in San Antonio.

James Johnson provides a useful device for launching us into this narrative, and he is well chosen as a villain. It was, indeed, unfortunate that such a capable political schemer—one, moreover, with enough of the self-righteous Midwestern moralizer in him not to care much for the counsel of others—should have wound up at the head of such a powerful agency. When you are earning one of the largest salaries in the world while haranguing the country on behalf of the downtrodden, you might see any attempt to hold you accountable as an assault on the country itself.