Fannie Mae’s Johnson Was ‘Pied Piper,’ Drove U.S. Off Housing Cliff: Books
James A. Johnson cuts a powerful figure as he makes his way around Wall Street and Washington in horn-rimmed glasses.
He’s a man of prestige: vice chairman of private-equity firm Perseus LLC; head of the compensation committee at Goldman Sachs Group Inc. (GS); former adviser to Democratic presidential aspirants including, briefly, Barack Obama.
He’s also a “Pied Piper” who led the U.S. down the path to housing hysteria, to hear Gretchen Morgenson and Joshua Rosner tell it in “Reckless Endangerment,” a late though welcome book on a debacle that ejected millions of Americans from their homes and jobs.
You might be asking, “James A. Who?” Unlike Richard S. Fuld Jr., Johnson has hardly become a common synonym for excess and greed. Yet from 1991 through 1998, Johnson served as chief executive officer of Fannie Mae, the government-sponsored enterprise that some critics call “ground zero” in the subprime-mortgage explosion.
Morgenson, a New York Times columnist with a reputation for outing scoundrels, and Rosner, a housing analyst who called the bubble early, seek to connect the dots between Johnson’s tenure and the $2 trillion meltdown that followed. Though many observers have asserted that Fannie Mae and government meddling caused the disaster, this fast-paced, original narrative comes closest to making the case.
Drawing on more than a decade of reporting, Morgenson and Rosner argue that Johnson laid out a blueprint for other institutions, from mortgage lender Countrywide Financial Corp. to Goldman Sachs. In his lobbying to preserve Fannie Mae’s government ties, Johnson showed bankers “how to control their controllers and produce the outcome they desired: lax regulation and freedom from any restraints that might hamper their risk taking and curb their personal wealth creation.”
The contention remains sensitive. Source after source in this book speaks only on condition of anonymity. Johnson himself didn’t respond to interview requests made over five months, the authors say.
In response to my own request seeking comment three days ago, Johnson’s assistant at Perseus, Tandis Demopoulos, said the executive was “traveling overseas with limited phone access” and offered to get back to me “should he wish to comment.”
A Minnesota boy made good, Johnson is usually remembered as a Beltway power broker. He was chairman of Walter Mondale’s campaign against Republican President Ronald Reagan in 1984 and served as a senior adviser to John Kerry’s run for the White House two decades later. In these pages, though, he comes across as a man who used his political prowess to secure personal riches.
When Johnson became CEO, Fannie Mae was fending off suggestions that it should become fully private. Fannie had much to lose. Though publicly traded, the company enjoyed government- bestowed advantages over private rivals. It paid lower taxes, could borrow at cheaper rates, was required to hold less capital and enjoyed a $2.25 billion line of credit at the U.S. Treasury.
Johnson was determined to protect those benefits, which would allow him to make the company bigger, more profitable and more lucrative for himself, the authors say. So he wrapped Fannie Mae in an altruistic-sounding drive to increase the number of Americans who own homes. He was “the original, if anonymous, architect” of President Bill Clinton’s strategy to boost the homeownership rate to almost 70 percent.
Positioning Fannie Mae as a do-gooder helped inoculate the company from critics who feared it would one day need a taxpayer bailout, the authors say. It also provided political cover for expanding the company’s loan volumes and loosening its lending standards. When you commit yourself to spending $1 trillion on affordable housing, as Johnson did, something’s got to give.
Ensconced in its colonial-style headquarters in Washington D.C., Fannie Mae automated its lending process, eliminating traditional due diligence, the authors say. It lowered standards, both on down payments and acceptable ratios between a borrower’s monthly mortgage payment and his or her income, they write.
So as the loans on its books swelled, they were growing riskier. In 1992, only 6 percent of the loans Fannie purchased represented more than 90 percent of a home’s value, the authors say; three years later, the portion stood at 19 percent.
All of this translated into soaring earnings for shareholders and rising pay for Johnson. In 1998, his total compensation reached almost $21 million, according to a regulatory report on improper accounting at Fannie.
Written in a smooth blend of hard reporting and lucid analysis, “Reckless Endangerment” crackles with indignation and telling anecdotes, some familiar, some less so.
We’re reminded, for example, of the “deeply symbiotic relationship” between Johnson and Angelo Mozilo, the tanned and French-cuffed CEO of Countrywide, which became Fannie Mae’s largest loan provider.
The authors also recall a gutsy Congressional Budget Office analyst, Marvin Phaup, who concluded that Fannie Mae and her little brother, Freddie Mac, received benefits from their government ties that totaled $6.5 billion in 1995.
The size of the subsidy, though a bombshell itself, was overshadowed by Phaup’s stated discovery that the companies retained $2.1 billion of those benefits for themselves and their shareholders. No wonder Johnson’s pay packet was so fat.
Was the entire subprime debacle the fault of Johnson, Fannie Mae or, more broadly, the Clinton administration? Of course not. The worst excesses were committed by Wall Street much later in the game, as this book makes clear.
Still, Johnson once asserted that Fannie Mae would never cost taxpayers a dime, the authors say. To date, Fannie and Freddie have cost Americans more than $160 billion.
(James Pressley is a book critic for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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