Reckless Endangerment. How outsized ambition, greed, and corruption led to Economic Armageddon
2011 by Gretchen Morgenson and Joshua Rosner
This book makes the case that Fannie & Freddie started the mortgage crisis and then Wall Street got in on the game and enormously magnified the scale of the corruption and damage of the bubble.
Some reviews of this book in: the New York Times, USA Today, and the Washington Post.
Ilargi at theautomaticearth July 13, 2010
Fannie and Freddie are the main cause why home prices in the US have risen so high that millions of Americans are being evicted from their homes as we speak simply because they can’t afford to live in them anymore. Fannie and Freddie (and the FHFA and FHLB and Ginnie Mae) have been used to guarantee any mortgage at any price and at any liar’s conditions, and all at the risk of the American people.
Charles Hugh Smith sums it up very well, read it a few times, I’d recommend, though he’s got the time-frame wrong. It’s not the con of the decade, it’s the largest financial con ever perpetrated on the American people since 1776:
The Con of the Decade Part I
1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating unlimited demand for fraudulently originated loans.
2. Sell these MBS as “safe” to credulous investors, institutions, town councils in Norway, etc., i.e. “the bezzle” on a global scale.
3. Make huge “side bets” against these doomed mortgages so when they default then the short-side bets generate billions in profits.
4. Leverage each $1 of actual capital into $100 of high-risk bets.
5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).
6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.
7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.
8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.
9. Slowly acquire trillions of dollars in Treasuries–not difficult to do as the Federal government is borrowing $1.5 trillion a year.
This part hasn’t happened yet, but still could:
10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.
11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.
12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.