Home > 2011 > Personal Finance

“Reckless Endangerment” Examines Who Burst the Bubble

Advertiser Disclosure Comments 2 Comments

If the housing boom was a drug epidemic, investors were like crack addicts, driven by the need for more and more profit. Mortgage brokers were the street dealers, doing the dirty work to get the deals done.

And Wall Street was the drug cartel. Investment firms including Goldman Sachs, Merrill Lynch and Lehman Brothers controlled the mortgage business from top to bottom. They knew they were selling poison. But they continued anyway, because they were making so much money, according to “Reckless Endangerment,” a new book by New York Times writer Gretchen Morgenson and financial consultant Joshua Rosner.

It’s the second book published this month to reach the same conclusion, that Wall Street firms were responsible for the subprime mortgage bubble and bust.

“Just as drug lords know that their products pose hazards to their customers, the Wall Street firms packaging and selling mortgage pools to investors knew well before their customers did that the loans inside the securities had begun to go bad,” according to an adaptation of “Reckless Endangerment” published in the Huffington Post.

The new book is the latest in a string of publications with similar findings. As we reported earlier this month, law professor Kathleen Engel followed the subprime mortgage boom from its beginning in the late 1990s. Her book, the “Subprime Virus,” reached the same conclusions as Morgenson and Rosner about who caused the current mess.

[Article: A Subprime Pioneer’s Notes on the Financial Crisis She Predicted]

“The investment banks like to portray themselves as just innocent middlemen,” says Engel, a law professor at Suffolk University in Boston. “That’s just not true. They made the market. They were in control.”

Where Engel’s research is airtight and her descriptions meticulous, Morgenson and Rosner shoot from the hip. The excerpt printed in Huffington Post careens randomly from Goldman Sachs’ role in orchestrating the mortgage meltdown to the collection of Ansel Adams photographs amassed by Fremont Investment & Loan, which used Goldman’s money to sell $28 billion in mostly subprime mortgages in 2006.

But if the writing in “Reckless Endangerment” feels a little overheated and disorganized, it may do a better job than Engel’s relatively academic work of translating the arcane actions of Wall Street investment firms into plain English.

By early 2004, fees from securitizing new mortgages began to falter because most people who could afford to buy homes had already done so, taking advantage of the Fed’s super-low interest rates. So Wall Street firms faced a choice, Morgenson and Rosner write: Do the hard work of finding legitimate ways to keep profits high, or take the easy route and keep the mortgage geyser going by offering ever-more risky loans.

Wall Street chose the easy route, Rosner and Morgenson find.

[Article: Finally, Bank Villains Are Named]

“(K)eeping the mortgage machine humming would also require that investment banks ignore numerous signs of wrongdoing along the way. This meant putting their own interests ahead of their clients’ at every turn,” they write. “While nobody mistook Wall Street banks for charity organizations, the degree to which these firms embraced and facilitated corrupt mortgage lending was stunning.”

Wall Street deceived its customers by hiding risky loans inside larger packages of safer mortgages, and paying ratings firms to describe the deals as safer than they really were, Morgenson and Rosner find. Firms including Bear Stearns and Morgan Stanley also created side bets called Collateralized Debt Obligations, which ostensibly acted like insurance but actually increased the risk by allowing investors to bet multiple times on the same–fundamentally bad–mortgages.

Most insidious, these complicated investment deals “allowed the firms who were selling them to bet against the clients buying them,” Morgenson and Rosner write.

“It’s like dog racing,” Engel told us. “You could have a trillion dollars’ worth of bets on an issuance of a million dollars.”

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Pingback: Reckless Endangerment Examines Who Burst the Bubble » HIGHER PRICED MORTGAGE LOANS()

  • http://None Mahendra P. Goel

    It is an unfortunate TRUTH that being Over Ambitious, Too Selfish, Too Greedy and Highly Self-Centered has always led to DISASTER – Where We All Stand Today. US Administration took a Major Step by becoming TOO EAGER to Bail Out Bad Decisions Makers. History is a witness to all such deeds and where they led us to? BLAMING ALONE WOULD NOT HELP, BUT

    • http://None Mahendra P. Goel


Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team