These two well-researched volumes, Reckless Endangerment and Age of Greed, provide complementary examinations of the financial crisis of 2008-9. Both books approach the issues by looking in-depth at how leading players acted. They review the rapidly evolving global casino and the role of financial innovations and regulatory missteps that led to the collapse.
Veteran NY Times reporter Gretchen Morgenson teams up with market insider Joshua Rosner in Reckless Endangerment to explore how Fannie Mae and Freddie Mac went from their small role in the US housing market to underwriting most of the US mortgages and leading the charge in securitization and mortgage-backed securities. They focus on the role of James Johnson, CEO of Fannie Mae to tell the wider story of how Washington politicians were manipulated. They detail the lobbying, campaign contributions and influence-peddling by the Fannie Mae Foundation and the escalation of executive salaries.
All of this led Wall Street to follow suit into the mortgage securitization game. No earlier book on the financial crisis of 2007-8 covers in such detail the GSEs and how they ended up as wards of the US taxpayers. Since the Dodd-Frank law left Fannie and Freddie untouched, the reform of the GSEs is still an urgent issue on the US agenda. Others have covered the housing bubble in similar detail, notably Paul Muolo and Matthew Padilla in their Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis (2008) and the scandals of the mortgage origination game. Lawyer Ellen H. Brown's Web of Debt deep investigation of the foreclosure frauds also tracks the computerization of mortgage documents and the Mortgage Electronic Recording Service (MERS), which destroyed original paperwork that most US courts require in foreclosures. Morgenson and Rosner also provide enlightening inside looks at the Byzantine relationships between Wall Streeters, Washington politicians, think tanks, academics and grassroots advocacy groups and how the seductive vision of home ownership as central to the American Dream led them all into the housing bubble.
Jeff Madrick's Age of Greed provides a complementary context, telling the story of Wall Street and its Washington regulators through successive administrations. Madrick tracks how Glass-Steagal and other regulations were dismantled. These New Deal laws had helped protect investors until the onset of the ideologies of deregulation took hold under Jimmy Carter, Ronald Reagan, George H. W. Bush and Bill Clinton – culminating in the bailouts and socialization of markets under George W. Bush and Hank Paulson, which continue today under Obama, Bernanke and Geithner.
Madrick also tells his historic tale through the personal careers of key Wall Street and business players: from Waller Wriston, Ivan Boesky, Ted Turner, Sam Walton, Steve Ross, Paul Volcker, Jack Welch, Michael Milken, Carl Icahn, George Soros, John Meriweather, Sandy Weill, Jamie Dimon, Jack Grubman to Jimmy Cayne, Richard Fuld, Steve O'Neal and Chuck Prince. Through these personal stories, author Madrick traces the shift from partnership firms to publically traded companies, conglomeration, M and A, derivatives and the rise of hedge funds.
The next chapter is still to be told: how global satellite communications, the internet and other public investments created, along with computers, the new issues: still unregulated derivative and high-frequency trading and the off-shoring of finance in tax havens. As retail investors flee Wall Street, they fear these new trends, along with the latest bubbles in commodities and ETFs. We at Ethical Markets Media keep abreast of these trends in our Transforming Finance initiative. We also worry about carbon trading and the frauds around carbon derivatives ("From Rigged Carbon Markets to Green Investing") and the mis-pricing of fossil fuel reserves ("Pricking the Carbon Finance Bubble"). We are watching trends as investors bypass Wall Street in favor of local, sustainable companies they can understand, along with LEED-certified real estate, solar trees in parking lots, LED lighting, energy efficiency, solar, wind and other renewable investments and finding new asset classes like Entrex Tigrcubs (www.entrex.net) and those they fund at Investors Circle, SJF, Slow Money and such funds as those of RSF Social Finance and Portfolio 21. The US economy can grow in a more efficient and sustainable direction with more accurate asset valuation models and the new quality-of-life indexes (Beyond GDP).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.