‘Reckless Endangerment’ by Gretchen Morgensen and Joshua Rosner, published by Times Books

I first heard about this book when listening to the National Public Radio - NPR - station in the USA (if you visit the States, do try to find it, their equivalent to Radio 4). Gretchen Morgensen was being interviewed and I was amazed at her outspokenness and clear thinking. I went to buy the book next day.

Most of the books I have read about the financial crisis stress the multi-faceted nature of the causes, with no clear conclusion about the dominant reason. Ms Morgensen and her co-author are quite different. They trace the causes back to the Clinton era and the decision to extend home ownership to the American masses, and to the development of two organisations Fannie Mae and Freddie Mac. Fannie Mae is an abbreviation of Federal National Mortgage Corp (and Freddie Mac something similar) and they both started life as government agencies to support house ownership before being privatised in the 1960s.

The story of what happened is a good lesson in the principles of moral hazard, the belief that if an organisation is seen as too big to fail, then those involved will act irresponsibly. The management of Fannie Mae - and in particular James A Johnson its CEO - encouraged the belief that the government would stand any losses and set about trying to achieve Clinton’s target of 70% of Americans owning their own homes, at any cost and by any means.

The book makes it clear that the drive by Johnson and his willingness to finance the sub-prime mortgages that we have heard so much about, was the underlying cause of all that followed. He was motivated both by personal aggrandisement and hefty bonus incentives to finance almost any property loan, based on flimsy assurances and dodgy documentation. He then followed this up by initiating the complex instruments that enabled them to sell on their liabilities to unsuspecting investors; he also deceived the ratings agencies into giving these securities a ridiculously credit rating which provided the trades with unjustified legitimacy.

Of course there are other guilty parties mentioned in the book, from Clinton to Alan Greenspan to incompetent bankers, but the authors focus on Fannie, Freddie and Johnson in particular. He was undoubtedly allowed to get away with it all because of unknowing accomplices in the banking sector and a much too light touch in regulation. The co-author Joshua Rosner claims to have raised a number of early warnings that were ignored by regulators.

This book is well written and sometimes it feels like reading a novel. If it was a work of fiction, you would probably keep saying - ‘surely that couldn’t really happen, people couldn’t be that stupid’. But they were!