AN elderly neighbor of mine asks, “Have you noticed that the worst economic crisis of our lifetime was set off by people with the highest education? If they’re all so smart, how come they’re so dumb?”
I hadn’t thought of it that way, but he has a point.
The meltdown began with the subprime-mortgage folly, when the political establishment pushed the real-estate industry and its bankers to grant mortgages to buyers who couldn’t afford them.
The chief architects of the disaster were the officers at Fannie Mae and Freddie Mac, urged on by politicians and monitored by negligent regulators.
Here’s a list of some of the main players and their academic credentials:
James Johnson: He was Fannie Mae’s chairman and CEO from 1991 to 1998, boasting that the company was doing well and “serving a public function at no cost.”
It was then discovered that Fannie Mae had improperly deferred $200 million in expenses, allowing Johnson and his cronies to walk away with huge bonuses. Johnson took down $21 million.
His credentials: A master’s in public affairs from Princeton University, later a member of its faculty.
Franklin Raines: Served as Fannie’s chairman and CEO from ’98 until he took “early retirement” in ’04, when he was accused of promoting massive accounting shenanigans enabling him and others to earn huge bonuses.
Raines left with a $90 million payout. He set in motion the subprime avalanche resulting in charges of “pervasive and willful” earnings manipulation, lax controls, perverse incentives, unjust bonuses.
Raines is a graduate of Harvard Law and was a Rhodes Scholar at Oxford.
Jamie Gorelick: Vice chairman of Fannie from ’97 to ’03, serving alongside Raines. In an interview with Business Week in 2002, Gorelick said, “We believe we are managed safely. Fannie Mae is among the handful of top-quality institutions.” A year later, regulators accused Fannie of a $9 billion accounting scandal, of which she was a prime beneficiary.
She walked away with $26 million.
Gorelick’s education: A BA (magna cum laude) from Harvard and a JS (cum laude) from Harvard Law.
Richard Syron: Chairman and CEO of Freddie Mac until he was terminated on Sept. 6. Like the rest, he made a killing while the ship was sinking beneath him. In 2007 alone, he took home $19 million in cash, stocks and other compensation.
Four years ago, Syron was warned by his own risk officer that Freddie Mac was embracing too much risk underwriting shaky mortgages. He brushed it aside.
Syron graduated from Boston College with a BA and earned advanced degrees in economics (can you believe it?) from Tufts University.
Rep. Barney Frank: One of Fannie and Freddie’s biggest boosters in Congress. In 2003, when the Bush administration recommended tighter regulation of the two companies, Frank rejected the idea out of hand, saying: “They are not facing any kind of financial crisis.” Famous last words.
Frank graduated from Harvard.
Sen. Chuck Schumer: Second only to Frank in the Congress in his unwavering support of Fannie Mae and Freddie Mac.
Three years ago, when Fed chief Alan Greenspan warned of problems with the two institutions, Schumer replied, “Fannie and Freddie have problems, and there are ideologues who want to undo it. But there are ways to fix the problems . . . When the sink is broken, you don’t want to tear down the house.”
Last July, Schumer raised an alarm on the solvency of a mortgage bank, IndyMac, setting off a panic among depositors, who withdrew $1.3 billion from the bank. Financial analyst Jerry Bowyer charged that Schumer had set off “the second largest bank failure in US history.”
Schumer got his BA at Harvard and JD at Harvard Law.
Sen. Chris Dodd: The No. 1 recipient in Congress of campaign funds from Fannie and Freddie. When they were about to crash with a thud heard round the world, Dodd said, “They are fundamentally sound and in good shape. To suggest they are in major trouble is not accurate.”
Dodd has a BA from Providence College and a JD from the University of Louisville.
The question arises: How could so many learned men and women, endowed with so many honors from America’s highest institutions of learning, set in motion the financial catastrophe that now grips the nation?
Conclusion: The evidence here is overwhelming that a superior education can certainly rake in big money – tens of millions of dollars, in fact – but sadly it is no guarantee of competence, judgment, prudence, trust or integrity.
Especially in politics.
Ray Kerrison has been a Post columnist for 20 years.