New York Times
Gretchen Morgenson
Gretchen Morgenson's first brush with journalism was not indicative of her later achievements. After graduating from St. Olaf College in Northfield and moving to New York City in 1976, she landed an $8,000-a-year job at Vogue magazine where she served, in her words, as an "assistant slave" to a tyrannical editor. But by 1981, her last year there, she was writing a personal finance column for the magazine. Eventually, she found her way to Forbes magazine, where she plunged into business journalism as an investigative reporter and editor under the command of legendary editor James Michaels. In 1998, she joined The New York Times as assistant business and financial editor. Four years later, she won the Pulitzer Prize for beat reporting for her "trenchant and incisive coverage of Wall Street." Week after week, her deeply reported Sunday column, "Fair Game," exposes CEO pay abuses, corporate governance failures, conflicts of interest, inadequate disclosures and dysfunctional regulation of the financial sector. Her stories frequently rattle CEOs at some of the country's largest corporations.
Morgenson will be the featured speaker Tuesday night in Minneapolis at the annual awards banquet of the Minnesota Chapter of the Society of Professional Journalists.
A compelling Minnesota theme pulses through her best-selling book, “Reckless Endangerment,” which she and housing finance expert Joshua Rosner wrote in 2011. They pin the primary blame for the 2008 financial meltdown on two powerful government-sponsored enterprises based in Washington, Fannie Mae and its younger and smaller brother, Freddie Mac. Their leading villain is Minnesota-born James A. Johnson, who rose to become the quintessential Washington insider: CEO at Fannie Mae from 1991 to 1998; chairman of the prestigious Brookings Institution; head of the Kennedy Center for the Performing Arts. Johnson's father, A.I. Johnson, was speaker of the Minnesota House of Representatives in the mid-'50s. James Johnson was president of the student body at the University of Minnesota, headed public affairs for Dayton Hudson Corp., taught at Princeton University and worked for a Wall Street investment bank. In 1984, he led Walter Mondale's presidential campaign.
Johnson leveraged government subsidies at Fannie Mae to build a political machine there that persuaded leading politicians from both parties to push for steadily higher rates of home ownership almost as a patriotic duty. “Reckless Endangerment” portrays him as the chief architect of a wildly overdone national love affair with home ownership. The authors contend that Johnson, more than any other individual, set the table for lenders, rating agencies, home-loan packagers and other private-sector players to pile on with high-risk subprime mortgage excesses that triggered the meltdown and deepened the recession in 2008. At the nadir of the financial crisis that year, Fannie Mae, once seen as the crown jewel of public-private partnerships, was brought to its knees when the federal government had to bail it out. By early 2014, it had sent back enough money to the government to more than cover the cost of the bailout, but today it has become, in Morgenson's words, a ward of the state.
Gretchen Morgenson earned her Pulitzer largely for pouncing on the abuses that surfaced when the dot-com and telecom bubbles popped, ending the long bull markets of the 1990s. I talked with her last week in a wide-ranging telephone conversation.
MinnPost: You're from Pennsylvania, and went to high school in Ohio. How did you end up at St. Olaf?
Gretchen Morgenson: Both of my parents went to St. Olaf. My grandfather taught chemistry there. I had a lot of Minnesota DNA in my family, a lot of cousins there. It was something my mother wanted me to do. And at St. Olaf College, I learned how to write a sentence.
MP: How did you get into journalism?
GM: I graduated in 1976. That was the Watergate era. Here I was reading all of these really great stories. I thought, wow, wouldn't it be great to be a political reporter covering Washington. I sent my résumé all around. The silence was deafening. Nobody was interested in hiring me. The only job I could get was as a slave at Vogue magazine. I could type more than 35 words a minute, so there were reasons why they hired me. I kind of elbowed my way up to writing a personal finance column there, which nobody read and probably nobody even knew they had.
MP: What happened next?
GM: I didn't have a rich father. I wasn't married. After five years at Vogue, where I had gotten an amazing salary raise to $10,000, l just didn't see living in New York on that kind of money. I decided, well, I'll go to Wall Street and, by building a client base, help people understand their finances. Because I didn't have an MBA, the only way I could do that was as a salesperson, as a broker for Dean Witter Reynolds. I'm convinced that I got the job because the Equal Employment Opportunity Commission had sued the major Wall Street firms because they were not hiring women. It was what I called my workingman's MBA, a great education into how everything got done — the way companies raise funds, how investors make money, a lot of the stuff I would be writing about later. I began in January of 1982, and I learned in the trenches. It was very propitious timing because it coincided with two seismic events. This was the beginning of the big, expansive bull market and of a time when people were taking on investing for themselves.
MP: A few years later, you went to Forbes. What's the biggest thing you learned from Jim Michaels, the longtime editor there?
GM: Jim Michaels was a very tough customer. He was a newspaperman. He had broken the story of Gandhi being assassinated in India. He taught me two important lessons. One was the reporting you had to do, in a company story, to make your argument about whether to buy or sell the company's stock. That meant reading balance sheets and income statements, but also going out to do shoe-leather reporting. The second thing he taught me was to be direct and not waste a reader's time. He often used the phrase, "pity the poor reader," when he complained about something you had written that was too long-winded.
MP: One of his colleagues once joked that Michaels could sum up the Lord's Prayer in six words and nobody would know the difference.
GP: He was brilliant. He was irascible. But what an education.
MP: You've identified " access journalism" as a problem. Explain that.
GP: I sort of separate journalism into two different kinds: accountability journalists who do what I do — speaking truth to power, helping readers understand who is doing what to whom when, how and where — and access journalists who tell the story from their source. Often, in Washington, the source is hidden from view rather than identified in the story. The problem with that kind of reporting is that the source has an ax to grind, but the reader doesn't know what that ax is. Readers may be relying on a journalist carrying water for a source but not sufficiently explaining that to the reader.
MP: Some libertarians call you a moralistic, anti-capitalist crusader. Some liberals say you let Wall Street off the hook by blaming so much of the meltdown on Fannie and Freddie. CEOs complain about your columns and stories. How do you deal with all of that?
GM: You're always aware of this and concerned about it. If I make a mistake, it's corrected. When people criticize me, it goes with the territory because I'm not part of the PR machine for these companies. But the thing that keeps me going, honestly Dave, is that I get so many emails from regular everyday people who say, “You're the only one doing this. Keep doing it. You're important. Keep shining the light.” The criticism from these companies that I write about — that's completely to be expected. I'm really intrigued by how many of these CEOs have extremely thin skin. They really take this kind of criticism almost personally. It is personal to some degree, but I think these are people who are never told “no.”
MP: They have yes people all around them.
GM: And so when somebody out there who they can't control is questioning their company's practices or whatever, then it's kind of a jarring thing for them because they're just not used to being questioned in any way, shape or form.
MP: Interesting. Let's go to Jim Johnson. Has he ever responded to you directly?
GM: He never did. I tried so hard to get to him. He didn't even respond to tell me he had received my emails and letters. At the end of the project, I was starting to worry. I thought maybe he hadn't gotten them. Finally, I found a secretary who said, yes, he was getting my messages. Later, I learned that he had a conversation with one of my colleagues at the paper and he had said, "Should I talk with her?" My colleague said yes. He never did.
MP: Did he respond in other quarters to your book?
GM: Never. Have not heard one word.
MP: How much was he paid at Fannie?
GP: I wish I could answer that question. For years, Fannie and Freddie never had to disclose what they paid in executive compensation. It's crazy.
MP: But you had $100 million in your book for him.
GP: That was an estimate.
MP: Isn't Jim Johnson still active in the business world?
GP: Yes. He's on the board at Target, and at Goldman Sachs. And he's always the head of the compensation committee at these company boards that he's on. He was on the UnitedHealth board at the time of that scandal about options backdating there. I don't know if he's still powerful in Washington. I think he probably is. I know he lives in a penthouse in Georgetown.
MP: Conservative columnists David Brooks and George Will were among the many who welcomed your book as a counternarrative to the still-prevailing view that Wall Street and the private sector were the leading villains in the meltdown. You laid out a different narrative, that it was largely Fannie Mae.
GM: My co-author and I thought it was important that people understand that the government had a very big role in setting up the process and in laying the groundwork. It wasn't just Fannie and Freddie. It was relaxing the underwriting standards. And the Federal Reserve, which never bothered to do the analysis of how problematic it was to have borrowers tapping into home equity constantly and spending it because their incomes weren't rising. So you had full-fledged government support of the idea of home ownership as a great good, something worth subsidizing. Wall Street's contribution was also huge — Goldman Sachs, Fremont Lending, Countrywide, others. Countrywide is the perfect example. Jointly with Fannie Mae, it underwrote mortgages that became questionable. Jim Johnson was at the center of making sure Countrywide was the biggest supplier.
MP: “Reckless Endangerment” wasn't published until almost three years after the meltdown, well after a deluge of other books about this debacle. How did holding off make this a better book?
GM: It gave us more perspective, and it also allowed us to do more analysis. Some of the early books were just kind of tick tock about what happened when, like the first draft of history. They weren't analytical on what went wrong and who was responsible. I also thought many of them did not help people understand the character of the people involved. It was almost as if there was a thesis that because there was so much blame to go around, it was nobody's fault. These things don't just happen. We felt it was important to shine the light on the people who played such a big role, and that included Jim Johnson.
MP: Fannie Mae continues to be the dominant owner and guarantor of home loans. Have Americans gotten around to a serious conversation about how much, or how little, the government should subsidize the housing market?
GM: Unfortunately, we have not. One of the goals of the book was to get people talking. We subsidize debt associated with taking out a mortgage by giving you a mortgage deduction. That encourages people to take on more debt. Why would we do that? What about giving people some sort of tax credit for building up equity? If the government had been subsidizing the building of equity in your home, then we would not have ever had the meltdown we had in 2008. People just tapped into their home mortgages because they were personally deductible. If we want to subsidize housing, and maybe we do, let's encourage the buildup of equity rather than the buildup of debt. The sad thing is that the biggest paradox of all was that the people the government said it was trying to help — first-time homebuyers, minorities, immigrants — were really hurt by the crisis.
MP: How about the CEO pay situation? We keep seeing these stories, by you and other journalists about the widening gulf between CEO pay and that of average workers. It's almost 15 times greater than it was in 1965. Why?
GM: The gap is astronomical. A couple of things are preventing change. One is that large institutional shareholders don't seem to care. Let's say you own 100 shares of Exxon or IBM. How you vote those shares at the annual meeting isn't really going to make a difference. The large institutions are the ones that have to take up the battle because their millions of shares are going to make a difference. The silence of the institutional investors has created this situation where nothing is ever going to change. Unfortunately, many of these investors are overseeing other people’s money.
MP: And the second reason?
GM: Boards of directors. They don't seem to care about their fiduciary duty to the shareholders.
MP: Financial manipulators went to prison after the 1929 stock market crash. This time, almost nobody has gone to prison. What's with that?
GM: We don't have to go back to the 1930s. We can just go back to the S&L crisis (in the late 1980s). A colleague of mine, Louise Story, and I did a large piece in 2011 on how only one major person had gone to jail in the latest crisis. Something like 800 went to jail after the S&L crisis. The question I get asked more than any other is, “Why haven't there been more prosecutions this time?” The Justice Department says, well, even if there is bad behavior, it might not be illegal. Maybe it was because the devastation of the economy was so great that the government didn't want to pursue individuals until the economy got back on its feet. I don't know the answer. I wish I knew. I really think this question has not been answered by people in the Justice Department or the SEC. People are just not buying these stories that it was immoral, that it was unethical and that it wasn't illegal.
MP: How do the subprime mortgage debacle and the financial meltdown stack up compared to the dot-com crash in 2000-01?
GM: Debt crises are always worse than those involving a stock-market plunge. A lot of stock-market value disappeared over the course of a few months during the dot-com crash, but that didn't involve debt. One of the things Jim Michaels taught me was that assets may shrink, but debt never does. If you have a house that's worth $100,000 one day, that's an asset. It can go down in value, but the debt you've taken out on a $100,000 mortgage never goes down unless you pay it off. So any crash that involves debt is going to be far more impenetrable than crises based on equity. In the mortgage crisis, there was so much money in real estate — trillions of dollars. It was just a larger problem than the dot-com crash, even though that one harmed a lot of people who were riding those stocks.
MP: Are some big banks still too big to fail?
GM: Anybody who tells you these big banks are not too big to fail is not telling the truth. The big banks are larger now because many of them acquired entities in the crisis. There have been some very good efforts to require them to have higher capital, as a cushion for a rainy day. The government probably shouldn't be in the business of saying there's a certain size you can't be bigger, but it can make it more expensive to be big. If we do that, believe me, these banks will figure out a way to reduce their size.
MP: Don't we have a significant disconnect between Wall Street and the rest of America?
GM: It probably reached its apex in the financial crisis because we found that Wall Street had created a mortgage security that was like a ticking time bomb and selling it to customers who didn't really understand what was going on. That was just a new low.
MP: Yes, it was pretty shocking.
GM: And some people knew they were there. Not just the firms. The rating agencies, too, Moody's and Standard & Poor's. They knew they weren't doing the due diligence they needed to slap Triple-A ratings on these securities. It was a big team effort, believe me. It wasn't just the firms on Wall Street. The greed factor was so large, so powerful.
MP: And now the market has come back, so maybe that's a reason for less of a disconnect now.
GM: Yes, exactly.
MP: I think I know what your answer will be, but I'll ask anyway. What's the likelihood of another meltdown?
GM: Sad to say, I see another crisis. It will probably surprise people. We have not addressed critical issues that were exposed during the crisis, and greed is part of human nature. The next crisis won't be in the mortgage industry. Everybody is watching that industry, so it will be somewhere else.
This interview has been lightly edited and condensed.