NPR

How 'Reckless' Greed Contributed To Financial Crisis

Gretchen Morgenson, who covers world financial markets for The New York Times, has been untangling the complex foreclosure mess and efforts to reform government regulations on Wall Street for several years.

Now Morgenson and co-author Joshua Rosner have written a book about the origins of the financial meltdown. In Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon, Morgenson and Rosner describe how regulators failed to control greed and recklessness on Wall Street.

Morgenson focuses on the managers of Fannie Mae, the government-supported mortgage giant. She writes that CEO James Johnson built Fannie Mae "into the largest and most powerful financial institution in the world."

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By Gretchen Morgenson and Joshua Rosner
Hardover, 352 pages
Times Books
List price: $30

But in the process, Morgenson says, the company fudged accounting rules, generated big salaries and bonuses for its executives, used lobby and campaign contributions to bully regulators, and encouraged the risky financial practices that led to the crisis.

Morgenson is an assistant business and financial editor and a columnist for The New York Times and the author of the Forbes publication Great Minds Of Business. She won the Pulitzer Prize in 2002 for her "trenchant and incisive" coverage of Wall Street. Joshua Rosner is a managing director at the independent research firm Graham Fisher and Co., which advises regulators and institutional investors.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

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DAVE DAVIES, host:

This is FRESH AIR. I'm Dave Davies, in for Terry Gross.

If you're a regular listener, you know we've often turned to the New York Times' Gretchen Morgenson for insight into the nation's financial crisis and efforts to reform government regulation of Wall Street. Now Morgenson and co-author Joshua Rosner have written a book about the origins of the financial meltdown.

It chronicles the failure of regulators to control greed and recklessness on Wall Street, and it focuses particular attention on the managers of Fannie Mae, the government-supported mortgage giant. Morgenson writes that CEO James Johnson built Fannie Mae into the largest and most powerful financial institution in the world.

Morgenson details how the company fudged accounting rules, generated big salaries and bonuses for its executives, used lobbying and campaign contributions to influence Congress, and encouraged the risky financial practices that led to the crisis.

Gretchen Morgenson is a Pulitzer Prize-winning business reporter and columnist for the New York Times. Joshua Rosner is a managing director at the independent research firm Graham Fisher & Company, which advises regulators and institutional investors.

Their book is called "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon."

Well, Gretchen Morgenson, welcome back to FRESH AIR. Good to have you.

Ms. GRETCHEN MORGENSON (New York Times): Thanks, Dave.

DAVIES: A key figured in this book and in the financial crisis, whose role you say has gotten relatively little attention, is James Johnson, who led and transformed, you know, the mortgage giant Fannie Mae. So let's start with explaining what Fannie Mae is and what its traditional role was in the mortgage industry.

Ms. MORGENSON: Fannie Mae was not a lender. It was not a bank. It was a institution that was created by the government back in 1938 to enable the housing market to operate smoothly during times of crisis.

That was right after the Great Depression, of course, or amid the Great Depression, and Fannie Mae was founded to try to sort of smooth over periods of time when private money - i.e., bank money - for mortgages was unavailable.

Now, if you fast-forward to, you know, the more recent past, the '90s, Fannie Mae was a - still not a lender, still not a bank, but it was a quasi-private company, meaning that it had shareholders, it generated earnings and paid out dividends.

And so it was a semi-private, semi-public institution, still charged with enabling homeowners to have access to mortgage capital but in a slightly different way.

DAVIES: Okay, so private banks or mortgage lenders would lend homeowners money to buy homes. Fannie Mae would then do what?

Ms. MORGENSON: Fannie Mae would then either buy those mortgages that the banks had made, allowing the banks to go out and make another mortgage with that money, or else they would guarantee them, package them in securities and sell them to investors.

DAVIES: All right, now tell them about James Johnson. What made him unique? Tell us about his background.

Ms. MORGENSON: Well, he was a political figure. He had been the campaign manager for Mondale's campaign, ill-fated presidential campaign in the '80s. And he went to or started a consulting firm in Washington and met up with the chairman of Fannie Mae in the late '80s.

And at that time, Dave, you have to go back in time to understand what was going on then, and that was really during the last large financial crisis that we had, which was the S&L crisis.

At that time, many, many S&L, savings and loans, were failing because of reckless lending and self-dealing by executives of these banks. And what was concerning to Congress was that Fannie Mae and its smaller cohort Freddie Mac might also have bad loans that they had picked up from S&Ls during that craze.

And so there came about this sort of interest in making sure that Fannie Mae and Freddie Mac, which were implicitly guaranteed by the government, to make sure that they would not have huge losses that the taxpayer would have to cover.

DAVIES: So James Johnson becomes the chief executive of Fannie Mae in, what, around 1990?

Ms. MORGENSON: In 1991 he is made the CEO. He follows a man by the name of David Maxwell, who had run the company very well, had sort of taken it from a near-death experience of its own back in the early '80s.

So Fannie Mae was on very solid footing in the early '90s, when James Johnson took over, and according to people who worked there at the time and worked with him, it became a completely political animal at that time.

It became all about preserving the government backing, preserving the -essentially the subsidies that the government was providing Fannie Mae and making sure that those sort of - that sort of special treatment or special relationship with the government never went away.

DAVIES: So Fannie Mae was in this weird position where a lot of people referred to it as a private entity and an example of the benefits of taking these institutions private. But in fact there were a lot of very specific ways in which the government underwrote its credit, in effect gave guarantees which allowed it to operate in effect at an advantage to others in the mortgage market, right?

Ms. MORGENSON: It had huge advantages to others in the mortgage market, the most, the primary one being that investors who bought its debt assumed that it would be bailed out if there were problems because of its government ties, because it had been created, you know, as the government.

And so that allowed it to borrow at a far lower rate of interest than a, you know, fully private bank, for instance, could borrow. So that was its primary advantage. But it had others.

For instance, it did not have to file its regulatory financial statements with the SEC. It had a call on the treasury. It had a line of credit with the treasury that it could call on. It had tremendous sort of benefits and perquisites that came with being what was called a government-sponsored enterprise.

DAVIES: Now, you write that in the 1990s, when Fannie Mae was headed by James Johnson, an executive with a political background, that in effect he and Fannie Mae gave Wall Street firms a model, a template, if you will, for their future behavior. What do you mean?

Ms. MORGENSON: I sort of characterize Jim Johnson as corporate America's founding father of regulation manipulation. And what that sort of means is, I mean this is a person who really, really wrote the blueprint for how to neutralize your regulator, how to manipulate Congress to get your way and, you know, essentially how to destroy your critics.

And they just took no prisoners over those years. They were extremely hard-nosed, extremely aggressive and abrasive, and really understood how to make sure that they had friends in Congress at all times.

Now, their regulator at that time was very weak. It was HUD, the Housing and Urban Development, and essentially what Johnson did, which was really amazing at the time, was to help write legislation in 1991 and '92 which became the Safety and Soundness Act that was designed to prevent Fannie Mae and Freddie Mac from calling on taxpayers in a time of failure.

He helped write the legislation in two critical ways: one, to make sure that his company did not have to maintain high levels of capital cushion - i.e., he did not have to set aside a lot of money for a rainy day if losses were to come across.

That meant that earnings were juiced. That meant his pay was increased. So that was a crucial thing that he did that wound up in the legislation. Fannie Mae's capital requirements were far lower than other banks.

The other thing that he did, and according to people who worked with him was very instrumental in, was making sure that Congress sort of was his overseer, not HUD, and so he kept HUD sort of under the thumb of Congress, where he knew he had a lot of friends.

DAVIES: What's fascinating about this story is that you have this entity, which you said became the largest and most powerful financial organization in the world, you had this entity, which has government guarantees and government subsidies, although perhaps indirect, but it engages in major political contributions and lobbying expenses. How big a player were they in terms of contributing to politicians and lobbying?

Ms. MORGENSON: They were very large. The numbers might not seem large in today's terms, but they were extremely shrewd and, you know, took great care, especially of the congressmen that were on the House Financial Services Committee and the senators on the Banking Committee.

They knew that these were very important people to their livelihood and to maintaining the government perquisites as they were.

One of the really big beneficiaries, albeit indirectly, was Congressman Barney Frank of Massachusetts. Back in 1991, when Congress was writing the legislation that would, you know, enhance or improve the oversight of Fannie Mae, or so they thought, Frank actually called up the company and asked them to hire his companion, who had just gotten an MBA from the Amos Tuck School of Business.

Of course the company was happy to provide a job for his companion and rolled out the red carpet in a series of interviews with a variety of executives, and it ultimately did hire the man. And he stayed there for I believe seven years.

So that was an example of the kind of thing that Fannie Mae would do. Now, when I asked Mr. Frank about this, I asked him, did it have any impact on his approach to the company. You know, was it a conflict? Did he feel that it had been a conflicted, put him in a conflicted spot? And he said absolutely not, that he didn't really remember being interested or having much to do with the 1992 legislation.

But the record shows that he was very aggressive and really tough on those who were testifying in Congress about reining in Fannie Mae and Freddie Mac. He was very aggressive to, for instance, the head of the Congressional Budget Office at that time, who was trying to call for increased capital requirements and to call for a focus on safety and soundness at Fannie Mae, that Frank really took him apart in testimony.

DAVIES: Right, and you write there were a number of occasions on which he defended Fannie and their record of promoting home ownership but in the end had a different view of the company, right?

Ms. MORGENSON: Well, after the taxpayers had to take it over, he, you know, came around, finally. But by then it was too late. He said: Well, we should shut them down. But, you know, it really was far too late, and he had been such a vocal supporter for so long that it was sort of an odd turnabout.

DAVIES: We're speaking with Gretchen Morgenson. Her new book with Joshua Rosner is called "Reckless Endangerment." We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, we're speaking with New York Times financial columnist Gretchen Morgenson. She has a new book with Joshua Rosner about the origins of the financial crisis. It's called "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon."

Now, you write that when Fannie Mae, when its interests were threatened in Congress, they were very aggressive. They took a take-no-prisoners approach to protecting their interests in Washington. Give us an example of how they worked.

Ms. MORGENSON: There was a very interesting moment. In 1996 a series of reports that had been requested by Congress after the '92 law was made to really look at the potential for privatizing Fannie Mae and Freddie Mac - that is, to remove the taxpayer backing, remove the government perquisites.

And so there were four studies that were requested by Congress, and one of them was by the Congressional Budget Office. Now, this is the, you know, independent arm that is - of the government that is supposed to, you know, not be political and supposed to just sort of let the numbers do the talking.

And June O'Neill was the head of the CBO at the time, and so they went about to write their report on whether or not Fannie Mae could be privatized.

And this was a fascinating moment because the chief researcher on the report was a fellow named Marvin Phaup, and he was the first to come up with a sort of - a cost or a number, a figure, in the billions, of what Fannie Mae received and Freddie Mac received in the form of the government perquisites and subsidies.

And he went one step further and assessed or estimated how much of that subsidy Fannie Mae was passing on to the homeowners and how much of the subsidy it was keeping for itself.

And what Phaup found, and the CBO found, was that Fannie Mae and Freddie Mac were keeping one-third of the government subsidy each year for themselves. And this was a blockbuster because Fannie Mae had said throughout history that it was - its sole purpose was to help homeowners, that it was going - if it were threatened, that homeownership would be threatened, that you would make the cost of homeownership rise significantly if you took away the government perquisites.

But now we actually had a, you know, figure from the respected Congressional Budget Office that proved otherwise. It was an incredible sort of moment of truth, emperor wears no clothes type of a moment.

DAVIES: So how did Johnson and Fannie Mae respond?

Ms. MORGENSON: Well, first of all, before the report was published, Fannie Mae sent a couple of its top executives to see June O'Neill, to try to persuade her not to publish the paper.

She described it as being visited by the mafia, and it was an interesting meeting because these two executives could not really explain why the CBO report was wrong. They couldn't pinpoint the errors in the analysis.

But what they ended up doing was again speaking in these bromides about homeownership, the costs of homeownership, how Fannie Mae, you know, wrapped itself in the American flag, essentially.

And so they tried to get her to tone it down, to not publish it as is, and she stood up to them. But that was not the end of it. She had to go and deliver her report to Congress, as required under the 1992 act.

And when she did, she had to withstand a firestorm of criticism from Fannie's friends in Congress who were literally reading from scripts that the company had supplied to them.

DAVIES: Now, so if Fannie Mae was tough and aggressive, some might say: Well, I'm not so troubled by that if in fact they're playing a positive role in the marketplace, if in fact they're extending homeownership to more people, if they're defending the interests of poor and middle-class people. What was James Johnson doing with the company while he was being so aggressive in defending its interests?

Ms. MORGENSON: Well, he was growing the company's balance sheet. In the early '90s what James Johnson saw was that this was a company who could that could be greatly expanded. It was also a very, very happy coincidence that he could wrap this expansion program in the American flag of homeownership.

There is so much sort of in the psyche about the positives of homeownership - he well understood that if he could capitalize on that, keep the government subsidies in place and grow his business, that he would become wealthy, and he did.

DAVIES: You open the book with President Clinton in 1994 announcing a new home ownership initiative - you know, the goal of which was to expand homeownership to more and more Americans.

And you write that this initiative began with a 1992 study of redlining by the Boston Federal Reserve Bank. And there was this effort to extend homeownership to Americans who hadn't been able to afford it in the past.

Now, what was its impact specifically on the way mortgages were issued, and how did Fannie Mae get involved?

Ms. MORGENSON: Well, Fannie Mae got involved because it too was interested in expanding homeownership, because of course it could then expand its operations so doing.

It was helpful in this process by automating underwriting standards, allowing loans to be made very quickly. The long process of going over documentation with your banker was - sort of started to be eliminated by Fannie Mae.

So Fannie Mae took up the charge of expanding homeownership with alacrity. I mean, it was very, very much involved in that and interested in the same outcome.

But what is really just so paradoxical, Dave, about this and really just the most poisonous paradox of all in this financial crisis is that the people that we were supposed to be helping to become homeowners, the immigrants, first-time homebuyers, minorities, are the very people who wound up being hammered the most by the crisis.

So you have this goal of expanding homeownership to increase the numbers of people who have not yet owned a home, and at the end of the, you know, mortgage boom you have them being hurt the most. Meanwhile, the people who, you know, came up with the idea, profited mightily from the idea, have left the scene with their moneybags or in positions of even greater power.

So I think that is maybe the most troubling paradox of all that came out of the crisis in my reporting.

DAVIES: Gretchen Morgenson's book with Joshua Rosner is called "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon." She'll be back in the second half of the show. I'm Dave Davies and this is FRESH AIR.

(Soundbite of music)

DAVIES: This is FRESH AIR. I'm Dave Davies, in for Terry Gross, back with New York Times financial writer Gretchen Morgenson. She's written a new book with Joshua Rosner about the origins of the financial crisis called "Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon." Much of the book focuses on the government-backed mortgage giant Fannie Mae. In the 1990s, the Clinton administration sought to expand home ownership among poor and working Americans. Morgenson writes that there was a push supported by Fannie Mae to relax lending standards so more people could get home mortgages.

In the mid-'90s what you see is standards for getting loans relaxed, you know, less rigorous examination of credit history or expectation of down payments. Are we looking at the kind of subprime lending that became so toxic later on, or is this something different?

Ms. MORGENSON: This was really the first step in subprime lending. I mean, there always had been a subprime lending category for people who didn't quite, you know, have, maybe, the documentation. Perhaps they were borrowers who had uneven income. You know, maybe they were a doctor who only, you know, earned based on surgical procedures. There were many people who had uneven income levels, and those were not what we now think of as subprime. But they were the kinds of people who had to really persuade the bank that, yes, they could afford to pay this monthly mortgage, even though their income, you know, sort of was volatile and rose at fell and wasn't sort of, you know, a constant, as is the case of most people.

So these reductions of standards - particularly the elimination of down payments or the, you know, reduction of down payment requirements, the relaxation of credit analysis - these were the very first steps, really, on the road to what became the full-blown, crazy Wild West of lending that we now know so much about, where you didn't even have to produce a W-2. You didn't have to produce any income tax forms. You didn't have to prove that you had a job. You practically didn't have to prove you had a pulse to get a mortgage. And so this, really, in the mid-'90s, was the first step down that road.

DAVIES: And the other thing that we saw a few years later was Wall Street firms taking a lot of these riskier loans, those more likely to default, packaging them together in securities, which they would then sell to investors. Was Fannie Mae doing that in these early days of this effort? Were they buying riskier loans from mortgage lenders and then making securities out of them?

Ms. MORGENSON: In the earlier days of, say, the mid-'90s and into the later '90s, I think that Fannie Mae was still pretty much on the up and up and not really buying the most sketchy loans. So there weren't a lot of subprime loans being made after 1990 - say, between 1998 and 2000, maybe 2001. But it did have, as its biggest supplier, almost, throughout this period, Countrywide Financial, which became one of the most - the biggest purveyors of toxic mortgages across the country.

So knowing that Countrywide was Fannie Mae's biggest provider of mortgages certainly does make one wonder about the quality of those mortgages, and certainly makes you think, well, when Fannie Mae did finally have to be rescued by taxpayers, those Countrywide loans were certainly a part of the problem.

DAVIES: And the head of Fannie Mae, James Johnson, had a special relationship with Angelo Mozilo, the executive of Countrywide, too.

Ms. MORGENSON: Yes. James Johnson understood that Countrywide was a comer, was a very aggressive, strappy company founded by an entrepreneur with a chip on his shoulder, not your typical banker. And James Johnson set about to really cultivate Mr. Mozilo and to make sure that Fannie Mae was the biggest recipient of Countrywide loans. He didn't want Countrywide selling its loans to Freddie Mac, the competitor of Fannie Mae.

And so he played golf with him. He, you know, it was a mutually, of course, satisfying relationship between the two men. But he cut the fees that Fannie Mae charged to Countrywide to guarantee its loans. It was an extremely close relationship.

DAVIES: We're speaking with Gretchen Morgenson. Her new book, with Joshua Rosner, about the origins of the financial crisis is called "Reckless Endangerment."

This book is replete with examples throughout the '90s and 2000s of voices who saw this coming and alerted regulators - or in some cases, people in the regulatory structure who tried to warn us. And one of them I really found fascinating is this guy Walker Todd, this guy from the Federal Reserve Bank of Cleveland. And this - well, he found an obscure provision in a law that raised a red flag. Tell us that story.

Ms. MORGENSON: It was interesting. It was 1991. So, again, this is after the savings and loan crisis had shaken everyone's, you know, confidence in the financial - our financial system. There was a new law that was being written to beef up the FDIC's ability to take over failing institutions. It was a good law that was really necessary that came out of the S&L crisis, and it gave regulators more power.

So it was an interesting moment in the writing of that law, that there came a sort of an amendment that had been brought to the floor by Chris Dodd which enabled insurance companies, brokerage firms, non-bank financial companies to tap into the Federal Reserve's special powers in time of crisis.

What that means is that these firms that had not been able to gain access to Federal Reserve borrowings in time of crisis - insurance companies did not have access. Brokerage firms had not had access. It was really only banks that were able to call on the Fed in times of trouble. This small, unnoticed part of the bill that was carried by Dodd expanded the federal safety net to include these companies.

It was a moment nobody noticed, except for Walker Todd, who was a research fellow at the Federal Reserve Bank of Cleveland. He thought this was fascinating, because the law that this was buried in was supposed to, you know, restrain the ability of financial companies to harm the taxpayer and to create losses that would be funded by the taxpayer. So it was counterintuitive. It was a paradox to Walker Todd that this small thing was inserted into the bill.

He tried to write about it. He, in fact, did write about it. He discovered that it had been inserted by the financial services companies at their request, and he tried to publish a paper talking about this expansion of the federal safety net. He came up against a buzz saw of criticism from the Federal Reserve Board in Washington. They tried valiantly to prevent the Federal Reserve Bank of Cleveland from publishing Walker Todd's report.

They failed, happily, and the report was published. But it was very, very interesting the degree to which the Federal Reserve Board seemed to want to keep that little amendment under wraps and to keep it from having the sunlight shone on it by this report that Walker Todd had produced.

DAVIES: So back in 1991, there's this obscure provision which says that we will bailout not simply banks that have mom and dad savings account in them, but financial firms that can gamble and take risks, they're also in the federal safety net. And the Fed says don't worry about that.

Ms. MORGENSON: Pay no attention to that.

(Soundbite of laughter)

DAVIES: Well, you know...

Ms. MORGENSON: And not only that, but they actually put a critical letter of Walker criticizing - a letter criticizing Walker Todd in his file after the article was produced.

DAVIES: There are many, many cases that you cite here - and some of them are highly technical, and we won't go into them here - of cases where Reserve requirements were relaxed or financial accounting standards were amended so that they essentially allowed a lot of financial firms to take much greater risks. And the Federal Reserve seemed to be always, in these cases, on the side of, you know, of laxity. Is - I don't know. Is there a motive you can discern for their failure to see what was coming here and do something about it?

Ms. MORGENSON: It's interesting, because looking back at various times when the Fed could have stood up and, you know, made a difference, could've said no, we're not going to allow these kinds of loans to be made, or we are going to increase capital requirements for banks -capital requirements are just a huge and - hugely important, because they are the cushion for the rainy day. They are the sort of money you put aside when losses arise, so that you don't have to go to the government to ask for money.

Obviously, the capital requirements were set too low during the years leading up to the crisis because we, the taxpayers, had to bailout these banks to a fare-thee-well. Well, along the way, as capital requirements were being reduced, the Federal Reserve was right in there taking the banks' side, making the banks' arguments for them. It was in the regulatory community that capital requirements did not need to be set as high as some might think, that banks had actually become extremely good at making sure they weren't going to write bad loans. They had become better at analyzing loss potential, and so therefore, the Fed felt it could rely on the banks themselves to come up with what kinds of capital requirements would be necessary.

It was really a dereliction of duty that was kind of shocking, really, to look back at, because it did lead to the point in time where we are now still trying to dig out of. And yet, these were the regulators who were supposed to be making sure that the taxpayers would not be hurt by reckless lending.

DAVIES: We're speaking with Gretchen Morgenson. Her new book with Joshua Rosner is called "Reckless Endangerment."

We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, we're speaking with New York Times financial columnist Gretchen Morgenson. Her new book with Joshua Rosner about the origins of the financial crisis is called "Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon."

We've talked so much about Fannie Mae, its power and its size. What became of it and the crisis?

Ms. MORGENSON: Fannie Mae and Freddie Mac were taken over by the taxpayers on the weekend of Labor Day, 2008. They have now amassed, I believe, about $150 billion in losses that the taxpayer has had to fund. And yet the people who were really, you know, there at the creation of the problem, who expanded the portfolio, who manipulated Congress, who neutralized their regulators, they're nowhere to be found. They certainly are not in the spotlight. They have left the scene.

DAVIES: And one of the details about this that I just find so fascinating that I know you've written about since then, are the legal bills that former executives of Fannie Mae and Freddie Mac have incurred at taxpayer expense. Tell us about those.

Ms. MORGENSON: Well, if this doesn't describe insult added to injury, then I don't know what does. After having absorbed Fannie Mae and Freddie Mac's losses, the American taxpayer are still paying the legal bills associated with a securities lawsuit. After the companies were found to have manipulated their earnings, their shareholders sued them and sued their executives. And that is many, many years ago, but the taxpayer now is paying to defend the executives of these companies in this shareholder lawsuit. And it's many millions of dollars, and it is, I think, just an amazing turn of events.

DAVIES: Now, we should also say that since we've talked a lot about James Johnson and you've written a lot about him in the book, you did try - make many, many efforts to get an interview. He did not respond to your requests, right?

Ms. MORGENSON: Yes. Over a period of five months, I telephoned, emailed - not even a response.

DAVIES: You know, there's a Republican narrative about the financial crisis, and it's essentially that it was driven by government meddling in the markets, specifically the insistence that we push home ownership into lower-income folks who really weren't financially ready for it, and that that was sort of the original sin and that Fannie Mae, you know, carried that program, Wall Street eventually got sucked in and accelerated it.

Folks will find some support for that point of view in your book, won't they?

Ms. MORGENSON: It's one element of it, I think, Dave. It is certainly not the whole story, because you certainly can't say that Wall Street was a passive player in this. You know, what I think is a way to - best way to describe this is that this was a public-private partnership that was embraced by all of these characters. And they wrapped themselves in the flag and made it seem that this was a win-win for everyone.

Now, if you had had regulators doing their job, and if you had had a tough overseer of Fannie Mae who made it increase its capital, who made the company take greater care with some of its loans that it - that it guaranteed or bought, then you wouldn't have had this problem. So you can't lay it simply at the feet of Fannie Mae, but you have to throw in all of these other characters that were acting in their own interests.

It wasn't about the homeowner. It wasn't about expanding homeownership so that immigrants could, you know, build a nest egg for their children, because the kinds of loans these immigrants were given had absolutely no ability to build a nest egg. They were so punishing in their terms, that there was no way the immigrant could possibly pay them off.

So it was an idea, but the execution - the idea was OK. The execution was disastrous. And it was because there were so many self-interested people at the trough.

DAVIES: And the government, I mean, the housing - Department of Housing and Urban Development, you know, whose secretary was appointed by President Clinton, who backed this, you know, homeownership initiative, were a part of the problem. Essentially, I mean, were they duped? Were they corrupted?

Ms. MORGENSON: Very hard to know. I mean, I think that it was a white-hat policy. It was an everybody-wins policy. Who could argue against homeownership? I mean, it's like arguing against apple pie.

And so that made people, perhaps, a little bit less vigilant. But you have to wonder about the regulatory failures, here. They were so extensive and complete that it becomes - you wonder if it's actually passive, and you start to think, no. It was more of an active role. You know, it was a failure that was actively done.

DAVIES: Meaning the regulators were, in effect, taken over by the people they were supposed to regulate?

Ms. MORGENSON: Well, it was regulatory capture, as the saying goes, that the banks - there was a sense, especially at the Fed, that they were in the bank's mindset - that these were people that they, you know, are in constant contact with. They become, in their mindset, in their circle, it's all - it's not adversarial at all. It is not a questioning relationship at all. It's sort of we're in this together.

And in some cases, the banking regulators even called the banks of their customers. So there was a sense that the regulators and the banks were in it together.

DAVIES: Before I let you go, you mentioned the - there was this financial reform bill, the Dodd-Frank bill passed last year that was a, you know, that was an attempt at curbing some of the abuses on Wall Street and preventing a recurrence of this - of the financial crisis. And you believe that one thing that it did not do was to deal with the too-big-to-fail problem. Did it strengthen regulation at all? Is there any hope that regulators will do their job next time?

Ms. MORGENSON: That's the difficulty, of course. You can write laws until you're blue in the face, but if you don't hire the right people who have the right attitude and the right approach, then I think you're always going to be at risk of having regulatory failure and watchdogs who are asleep and who sort of morph into lapdogs. But if we could have regulators with an appetite to regulate - but I don't know how you can really legislate that, Dave.

DAVIES: Well, Gretchen Morgenson, thanks so much.

Ms. MORGENSON: You're welcome. Lovely to be here.

DAVIES: Gretchen Morgenson's book with Joshua Rosner is called "Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon." You can read an excerpt on our website: freshair.npr.org.

We called James Johnson's office for comment on Morgenson's account of his tenure at Fannie Mae. Those calls weren't returned.

Coming up, rock critic Ken Tucker on the new album from Raphael Saadiq.

This is FRESH AIR. Transcript provided by NPR, Copyright NPR.

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