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How 'Reckless' Greed Contributed To Financial Crisis

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.
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Raphael Saadiq: Paying Homage To Soul's Past And Future

DAVE DAVIES, host:

Raphael Saadiq is a former member of the group Tony! Toni! Tone! Since
embarking on a solo career, he's become one of the leading proponents of
the neo-soul movement. His 2008 album "The Way I See It" was at homage
to Motown Records.

Rock critic Ken Tucker says Saadiq's new release "Stone Rollin,"
broadens his campus to take in other R&B styles as well.

(Soundbite of song, "Radio")

Mr. RAPHAEL SAADIQ (Singer/Songwriter): (Singing) I met this girl on
radio. Said say no low. She wasn't getting my sound. She kept the
thousand down. I told her turn up the bass. And the she gives me in my
face, face, face. I told her I had a girl.

KEN TUCKER: Three years ago, Raphael Saadiq's "The Way I See It" was a
neck-snapping collection of almost-perfect 1960s Motown-style soul. For
his new album, Saadiq is still intent on making a new generation mindful
of the great music of decades past. But he's expanded his areas of
exploration, make not merely clever referencing to Sly Stone's black
rock 'n' roll style, the epic ballads that emanated from Gamble and
Huff's Philadelphia International Records in the 1970s and the raw bark
of Stax Records' Memphis soul. And Saadiq admirably avoids nostalgia in
favor of fresh grooves that allow him to pursue his own obsessions.
These can range from a girl named Radio in the song that started this
review, to cooking up a Southern soul/country hybrid on "Day Dreams".
It's a speedy-tempo number with another reviver of the past, Robert
Randolph, on steel guitar.

(Soundbite of song, "Day Dreams")

Mr. SAADIQ: Have you ever wanted to buy someone you love something but
you couldn't afford it? But you just bought it anyway? You know how that
go.

(Singing) Yes, I'm living on daydreams. Gon' buy me something I can't
afford, uh huh. Yes, I'm living on daydreams. Gon' buy me something I
can't afford, uh huh. When the price ain't right and everything ain't
looking right, but you still want it all, uh huh. This line is long but
still I ponder. This here check won't last until October. But nothing
more special than bringing my gifts to you.

Oh, I'm living on daydreams. Living on daydreams...

TUCKER: What about the album title, "Stone Rollin," with its inversion
of Rolling Stones as a phrase that evokes both a Mick Jagger band and a
Bob Dylan song? Saadiq has said stone rollin' is a phrase he coined for
his own concept of taking chances, of rolling the dice to see what
happens. He wants to sound casual, but for an artist as meticulous as
Saadiq, chance is kept to a minimum. I get what he means, however,
especially when he turns that title song into a hymn to booty-shaking,
delivered with a precision that's all the more impressive for seeming so
tossed-off.

(Soundbite of song, "Stone Rollin'")

Mr. SAADIQ: (Singing) Fat lady shakin, backbone breakin. Come on. This
girl of mine. Everything she's got is movin and hot. Come on. Come on. I
was just a friend but she took me in said. Come on. Everything was
right. I felt like the light said come on.

It makes a blind man walk away from home. You'll tell your girlfriend
you wanna be alone. And make an old man throw away his cane. Girl what
yo booty doing I just cant explain.

Listen, You don't call her fat...

TUCKER: With Saadiq, the whole package counts. Which is to say, almost
everything about him is loaded with signifiers. His heavy horn-rim
glasses suggest less nerdiness than an intellect forever in search of a
new music-history theory. His impeccable suits and ties and turtlenecks
nod to the polish of Motown's famous finishing-school for stars and a
polite respect for his concert audiences. And when this longtime bass
player brandishes an electric guitar and fronts a live group that has
little use for sampling, it's not so much about returning to the idea of
the black rock band that was largely abandoned after George Clinton's
Funkadelic stopped making epic albums. No, it's more about how to make
rock-band instrumentation do the emotional work that hip-hop does now.
Thus "Heart Attack."

(Soundbite of song, "Heart Attack")

Mr. SAADIQ: (Singing) You giving me a heart attack. Girl I want you
back. I just cant stand it no more. You giving me a heart attack. Girl I
want you back. My heart cant take it no more. Do you know how it feels
when the pain feels like it could kill? It just knocks you to the floor.
She screams your name like she's next door. It gets you down to your...

TUCKER: With its Sly Stone "Dance to the Music" rave up pace, "Heart
Attack" is relentless. It's the kind of music that could revive go-go
boots. To return to what I was saying about the whole package: The CD
cover of "Stone Rollin'" depicts a racially diverse group of young
people dressed in '60s-style clothes, arrayed around a guitar-playing
Saadiq; the audience recalls the one that used to fill the TV studio for
Dick Clark's "American Bandstand." It's another measure of Saadiq's
mass-audience outreach. He wants to appeal to young and old, black and
white, rock and hip-hop.

The one market segment he probably won't attract is the hip cutting
edge, but Raphael Saadiq has made it abundantly clear that he believes
trying to be hip is a loser's game. For him, attempting to reach the
broadest audience possible, employing a series of musical references his
audience may find either square or simply foreign, is as daring as
anything an artist can attempt right now.

DAVIES: Ken Tucker is editor-at-large for Entertainment Weekly.

(Soundbite of music)

Mr. SAADIQ: (Singing) Mama you told me you were coming over Sunday to
read me my fairytale...

DAVIES: You can join us on Facebook and follow us on Twitter at
NPR/FRESH AIR. And You can download podcasts of our show at,
freshair.npr.org.

For Terry Gross, I'm Dave Davies.

(Soundbite of music)

Mr. SAADIQ: (Singing) ...girl I'm (unintelligible). You're truly a
blessing.
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