Five Questions With journalist and author Bethany McLean

Date: June 25, 2020

Journalist and author Bethany McLean has made a specialty of telling complex financial stories. Her first book, The Smartest Guys in the Room (2004), co-written with Peter Elkind, examined the Enron scandal, which she and Elkind covered as staffers for Fortune magazine. Her 2011 follow-up, All the Devils Are Here: The Hidden History of the Financial Crisis, co-authored with Joe Nocera of The New York Times, looked at the actions and inactions behind the recession.

McLean visited with The Score to discuss her latest book: Shaky Ground: The Strange Saga of the U.S. Mortgage Giants, published in September as the first title in the new Columbia Global Reports series from Columbia University. The book considers Fannie Mae and Freddie Mac in their current conservatorship under the federal government, the history that got them into that state, and the challenges that make ending their conservatorship so daunting.

At 150 pages, Shaky Ground is considerably shorter than your earlier books. What’s the thinking behind the compact format, and what were the challenges of getting the GSEs’ complex history and current status into such a slim book?

Actually, one of the exciting things about the new publishing project known as Columbia Global Reports, which published Shaky Ground, is the shorter length. The books are meant to give journalists an opportunity to dig into topics that are too long for a magazine story but don’t quite merit a book—or in this case, to dig into topics that would scare off readers if they clocked in at 200 or 300 pages! Seriously, I think the GSEs are critically important and totally fascinating, but they are the opposite of click bait.

Your previous book, All the Devils Are Here, took a fairly extensive look at the roles of Fannie Mae and Freddie Mac in the great recession. What new insights did you gain as you focused more exclusively on the GSEs while writing Shaky Ground? Did anything you uncovered in your research surprise you?

In a way, All the Devils inspired this book. We wrote that the silver lining to the financial crisis was the idea that the government would take on our cult of homeownership, decide if it really made sense for a modern society, and if so, figure out how to finance homeownership in a smart way. Instead, here we are, seven years after the crisis, and what was meant to be a “time-out” for the GSEs has become a seemingly permanent state of limbo. It is a fantastic example of government dysfunction. I’m not sure if anything surprised me, but I guess I hoped that I’d find a good answer as to why the GSEs are in the state they are in, and maybe even discover that someone had a plan for the future. I did not.

You write in Shaky Ground that it’s probably too late in his presidency for Barack Obama to solve the GSE problem, and that his successor will almost certainly have to. If you could pose a question about this issue at both parties’ presidential debates, what would it be? And what would you be listening for in the candidates’ responses?

Ha, I wish! I would ask the candidates to explain what they would do, given a plunging homeownership rate and rapidly rising rents, to make sure Americans can afford homes. If not the GSEs, then what? And if it were a Republican debate and the candidate responded by blaming the financial crisis on the GSEs and their affordable housing goals, I would point out how completely asinine that argument is and ask them to start over.

In Shaky Ground, you explain that the long-term, fixed-rate mortgages we’re used to in the U.S. exist nowhere else (except Denmark), and couldn’t exist without the GSEs to backstop lender risk and redistribute it to investors—a role private enterprises historically have been reluctant to fill. As the federal government decides the fate of the GSEs and their conservatorship, do you foresee major changes in the nature of U.S. mortgage products and homeownership?

I wish I could say “yes” to that question. One of the things that did lead to the financial crisis was the conflation of homeownership and credit creation. A good percentage of the risky subprime loans—and Alt-A loans—that eventually defaulted were not mortgages that were used to buy a home, but rather cash out refinancings. If we were to think about homeownership in a smart way, we’d make sure that what we were encouraging was actually homeownership, not loading your home up with so much debt that you end up without the home. It’s perverse. But for some reason, no one has been willing to take that on.

Imagine you’re writing a follow-up to Shaky Ground, five years from now. What do you think its title will be, and why?

What do you think about “Earthquake”?! Seriously, right now, the rules of the game are being shaped by big bank lobbying. If the big banks end up controlling the primary and the secondary mortgage markets, they will be too big to fail for sure. In which case, all the financial reforms we’ve worked so hard on will be moot. Another possibility is that the investors could win their lawsuits. It’s not clear what the remedy would be—but I don’t love the idea of our housing finance system, which is critical to most Americans’ lives, being dictated by a court decision. Our government has the opportunity to be smart about this and set up a system that makes sense for the world in which we live. I hate that they aren’t taking it.