The Perils of Feeding a Bloated Financial Industry

The following is an excerpt from an article in:


The New York Times
Sunday, October 28, 2012

The Perils of Feeding a Bloated Financial Industry

By GRETCHEN MORGENSON

THEY say the wheels of justice grind slowly, but should it really have taken more than five years for the Justice Department to discover that Countrywide Financial, the mortgage mania’s top creator of risky loans, dumped a load of that junk on Fannie Mae and Freddie Mac?

Last week, the Justice Department filed a civil suit against Countrywide and its acquirer, Bank of America, seeking to recover $1 billion in losses suffered by Fannie and Freddie, now taxpayer-owned, from 2007 to 2009. Preet Bharara, the United States attorney in Manhattan who brought the case, said Countrywide was accused of conduct “spectacularly brazen in scope.”

In case you’ve been away from Planet Earth these past five years, Countrywide was legendary for its toxic loans and aggressive sales tactics. And its close ties to Fannie Mae have long been detailed in public documents filed with the Securities and Exchange Commission. For example, Countrywide was Fannie Mae’s biggest supplier of mortgages, many of which were Countrywide’s famous “Fast and Easy” loans. As for subprime loans, in 2005 alone, Countrywide sold $12.5 billion worth of risky mortgages to Fannie Mae.

Still, if the Justice Department’s lawsuit keeps taxpayers focused on the high societal costs that financial institutions like Countrywide have inflicted, that is all to the good. This is especially true given the immensity of the financial services industry and the power it continues to wield.

It is worth remembering that the credit crisis and ensuing economic downturn followed a spectacular expansion in the financial business, compared with other industries. Assessing the nature of that growth and whether it has benefited society is the subject of powerful new research by David Scharfstein and Robin Greenwood, professors at Harvard Business School.

In their study, “The Growth of Modern Finance,” the professors delve into figures showing that the financial industry accounted for 7.9 percent of the nation’s gross domestic product in 2007, up from 2.8 percent in 1950 and 4.9 percent in 1980. Finance’s share of G.D.P. grew faster since 1980, they found, than it did in the previous three decades.

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