Economic Armageddon: Gretchen Morgensen on How Wall Street Broke the Economy

Gretchen Morgensen was awarded the Pulitzer Prize in 2002 for her "trenchant and incisive" coverage of Wall Street and has been on that beat ever since. Her new book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (written with Joshua Rosner), lays out the toxic interplay between Washington, Wall Street and corrupt mortgage lenders that led to the meltdown. It examines how the watchdogs who were supposed to protect us from financial harm were actually complicit in creating the crisis.

Gretchen Morgenson is a business reporter and columnist at the New York Times, where she also serves as assistant business and financial editor. Prior to joining the Times in 1998, she worked as a broker at Dean Witter in the 1980s, and as a reporter at Forbes, Worth, and Money magazines.

Terrence McNally: What do you consider your path to the work you do today?

Gretchen Morgensen: I worked on Wall Street for three years, not a long time, but I did get a really good sense of how that place operates. People on Wall Street are extremely smart, aggressive and creative. They are also the intermediary for a lot of companies trying to raise capital, and can be a real facilitator for good. But in this crisis, that got started with a vengeance in the early ‘90s and built up to where we were in 2008 when many of these firms had to be taken over, Wall Street has had more of a pernicious impact. Some of their creativity has been used not to benefit investors, not to benefit Main Street, but simply to benefit themselves.

TM: Can you briefly lay out how Wall Street, Washington and the mortgage lenders danced together?

GM: One of the crucial parties that we focus on quite a bit in the book is Fannie Mae, the mortgage finance giant created in 1938 by the government to help facilitate lending to borrowers in the midst of the Depression. It was a noble idea, a noble cause. The company then morphed into a private company with shareholders to satisfy. We peg the beginning of the process that led to this crisis to Fannie Mae’s becoming a political animal in the early 1990’s. After the S&L crisis, Congress set about to try to write some legislation that would protect the taxpayer from losses arising at Fannie Mae and [its partner] Freddie Mac. And that process got completely perverted by James Johnson, the chief executive of the company from 1991 to 1998. Mr. Johnson is a powerhouse in Washington. Even now he is head of the compensation committee at Goldman Sachs’ board. He understood that he had to protect the company’s very lucrative, very rich government ties at all costs.

That meant that he had to neutralize his regulator. He had to buy off Congress. He had to form “grassroots” organizations across the country promoting home ownership that Fannie Mae could participate in as a do-gooder. It was all wrapped in the American flag of home ownership, but the subtext was to protect the company, protect top executives’ paychecks, and protect at all costs the government tie that was so lucrative.

TM: You write that Johnson came up with the game plan for how to neutralize and capture your financial regulator, which we’ve seen spread everywhere since then.

GM: Going into this crisis, we had only two companies that were too-big-to-fail and had the implicit -- which then became explicit -- backing of the U.S. taxpayer: Fannie Mae and Freddie Mac. Now, after the events of 2008, we have many more  too-big-to-fail institutions -- Citi Group, Bank of America, JP Morgan Chase, Goldman Sachs, all those banks that were rescued by the taxpayer in 2008 we now know are too big to fail. I think that this wrapping oneself in the American flag of home ownership, co-opting Congress, co-opting your regulator -- the strategy that Fannie Mae brought to a very high level -- was watched and mimicked by many of these institutions.