One of the last people you’d expect to be a catalyst for the near collapse of history’s most advanced financial system is the secretary of Housing and Urban Development. Though not the masterminds of the nation’s economic woes, Andrew Cuomo and Mel Martinez were willing musclemen for the Congressional and White House driven mandates that housing be made more affordable to all through government subsidy. Those mandates, policy stemming back to the 1960s, were driven by compassion, but have turned out to be the chief cause for the current rampant rates of default, foreclosure, and economic pain striking particularly hard at low-income families.
Such is the story Charlie Gasparino, CNBC analyst, tells in his new book, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System. Gasparino notes that Cuomo as much as boasted in the late 1990s about forcing Fannie Mae and Freddie Mac to expand their subprime mortgage portfolios. Not slowing down, the George W. Bush appointed Martinez carried the ball forward with great speed, presiding over a period of time where Fannie and Freddie grew to hold a combined $1 trillion in subprime mortgages.
These government-sponsored enterprises were the tools the government used to try and expand housing opportunities to more and more Americans. A noble goal, but one executed by disastrous means. To begin with, the policies—explicitly set forth by members of Congress and the executive branch—were directly a part of creating the housing bubble. Gasparino nails it in his book, saying:
One of the ironies of the bubble Fannie and Freddie helped create through their guarantees and purchase of subprime loans is that it made housing less affordable, not more so. To own a home, working-class and poor families were now more reliant than ever before on the various gimmicks the mortgage business offered—the adjustable-rate mortgages and “no-money-down” loans that allowed families to live in their homes at minimal initial cost, only to have their mortgage payments skyrocket later.
Government housing policies of the past several decades were the cause of other problems as well, including creating incentives for banks to over securitize mortgages. The implicit support Fannie and Freddie had allowed it to borrow cheaply, spend freely, and act irresponsibly. You, the taxpayer, had their back.
All the while, corruption at the highest levels was rampant. Gasparino also writes of the “Friends of Angelo” scandal, where the CEO of Countrywide gave sweetheart deals to allies on Capitol Hill—including the top Senate banking and housing overseer, Chris Dodd.
Ultimately, the story of The Sellout might be summed up by this line from President Bush at the height of the bubble about the goal of expanding homeownership to more low-income families, particularly minorities:
There’s all kinds of ways that we can work together to meet the goal. Corporate America has a responsibility to work to make America a compassionate place.
That is the attitude that has sunk us today. The crisis started with compassion, it was driven by excessive confidence, and we are paying the price today.
Pre-buy The Sellout from Amazon here.