How to destroy the world ... while making $14 million

In many ways Richard F. Syron pursued the dream career of plenty of economics majors.

He served as deputy assistant secretary of the United States Treasury and assistant to then-Chairman of the Federal Reserve Paul Volcker in the early 1980s.

Syron eventually scored a senior post at the Federal Reserve Bank of Boston, and it was there that his career path first became intertwined with the fate of most Americans.

In 1991 banks were required to expand the information they already provided the government to allow comparison of mortgage rejection rates by race. The data was not collected in a particularly useful way.

So in 1992 the Boston Federal Reserve attempted to explain the high denial rates for minorities. They came to a conclusion that shocked the nation into action.

They found that even after controlling for credit worthiness, minorities were denied mortgage rates at a much higher rate than whites.

As a result the Boston Fed released guidelines about lending to those who may have previously been denied due to questionable credit, and the government pressured banks to make those risky loans by threatening to hold them liable via the Community Reinvestment Act.

Home ownership went up, and banks that practiced flexible lending standards received “Corporation of the Year” awards. When it came to doubts about the Fed study Syron, as president of the Boston Fed, proclaimed “I don’t think you need a lot more studies like this.”

Anyone reading this who is about to enter the job market or who happens to own stock knows that this story has an unhappy ending. It turns out the Boston Fed study was riddled with errors, and critics claimed it showed no evidence of racist lending practices.

But the critics were ignored.

Any doubt about the value of loose lending was discouraged as Congress legislated the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to buy stinky mortgages. Eventually investment banks like Bear Stearns (R.I.P.) joined in on these subprime mortgages, citing government studies as proof of their value.

Ratings agencies, in one of the most regulated sectors of our economy, accepted the Boston Fed guidelines hyping up the value of those mortgages and issued AAA ratings like it was nobody’s business. 

By the time S&P, one of three corporations allowed to issue such ratings by the Securities and Exchange Commission, suggested that flexible mortgage standards were producing risky mortgages, it was 2006. The housing bubble was already at a crescendo, and those flexible standards had already been applied to credit-worthy people to give them ridiculously generous – and dangerous – mortgage terms.

Where was our old friend Richard Syron during all this? Well, in 2003 he became the chief executive officer of Freddie Mac. He did little to minimize the corporation’s risk and was terminated just a few months ago when Freddie Mac had to be essentially nationalized by the federal government.

As politicians galvanize the public with calls to punish those responsible for the crisis, keep in the mind that the government didn’t do much better with accountability than the private sector.

Even after his termination, Syron might still collect up to $14.1 million in severance and other payments.