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This book on the crisis is different for two reasons:

1) It focuses on the causes of the financial failure, and the history behind them. It spends relatively little time on the failure in 2008.

2) It spends almost all of its time on the GSEs, Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC). They were big contributors to the crisis, but they weren’t the majority of the crisis.

This book chronicles the growth of the housing bubble, which was a financing bubble, as most bubbles are. How did financing for housing get so cheap?

  • Low interest rates from the Fed.
  • Lower underwriting standards from Fannie, Freddie, and independent lenders.
  • Trickery from lenders offering a low initial rate.
  • Pressure from Congress to make more loans to low-income borrowers who should have been renters.
  • A mistaken idea that more housing owned by residents was good social policy.

It also describes many of the people who disproportionately benefited from the bubble, and what their motives were for helping to expand the bubble. It also mentions many who tried to fight the bubble unsuccessfully. It does *not* mention the “Fannie Fraud Patrol,” who helped to uncover Fannie Mae’s errors in 2003-2004. It was a loose group of analysts who found inconsistencies in Fannie’s financial statements… we fed OFHEO. I was one of them, and I have the T-shirt to prove it, even though my contributions were the least of the group.

One more note: consider Walker Todd, reprimanded by the Fed in 1993 for suggesting that the Fed should not be allowed to bail out non-banks. Prescient guy, punished of course. He was one of many who took the chance and fought the Fed or the GSEs. Almost no one comes out the better for that effort.

Quibbles

The authors blame the rating agencies rather than the regulators that demanded that ratings be used, even if the agencies were less than certain about their models. Real bond investors never look at the ratings, except as investment policy constraints.

Who would benefit from this book:

It’s an easy read. This book benefits from having a good writer, and someone who actually knows that markets. Great combination. Most people would benefit from this book, because it would disabuse them of the notion that the actions of the government are for the good of the nation. Special interests won, and many average people lost.

Disclosure: The publisher asked me if I wanted the book and I said “yes.”

Source: Book Review: Reckless Endangerment