Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis by Paul Muolo and Mathew Padilla. John Wiley & Sons, Inc. 2008.
If you're reading my blog, then I trust that you aren't interested in reading about Wall Street. I don't blame you. Like me, you probably figured that a life in the arts meant never having to know anything about money. Stocks, bonds, blah, who cares.
But it's important for culture creators to understand the world around them. Why is the economy tanking? What is it about human nature that made this happen?
Paul Muolo and Mathew Padilla don't delve into such philosophical aspects in "Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis." Instead, they give you the meat of the crisis and a map of the bones in the closet.
Countrywide CEO Angelo Mozilo appears briefly in the beginning to set off a chain of events. Flamboyant and tough-talking, Mozilo is sympathetic enough. Things seemed to be going well for Mozilo until Countrywide got into the subprime mortgage business. By July 2007, earnings were down by a third. During a second quarter conference call, Mozilo was asked by analysts when the housing market would improve. "2009," he told them. "We are experiencing a huge price depression, one we have not seen before - not since the Great Depression."
Wall Street runs on emotions and perceptions, and the word "depression" spooked investors. According to Muolo and Padilla, the Dow Jones plunged 226 points on the basis of this conference call.
As the authors recount the history of mortgages and dubious loans, a herd mentality begins to emerge. Southern California becomes home to many mortgage companies, who open and close within a short time. Deregulation takes hold and suddenly everyone needs a loan broker.
"Just how much experience did a loan officer or broker need in this era (the 90s)? In Peter Cugno's opinion, the basic requirements were these: 'You had to be a high school graduate. You had to be clever, mature, and have an upbeat personality.'"
And then, scandals erupt. A former stripper who became a loan broker bilked homeowners out of $60 million. Her scam? Financially troubled homeowners signed their houses over to her company. Once their credit had been successfully rescued, they expected to get their houses back. Instead, they were charged 40 percent interest on the original loan.
When Ameriquest enters the stage, the book heats up. The authors believe that Ameriquest accelerated the bacchanalian energy of the mortgage industry. Account executives were in charge of "bringing in loans." Such positions could make anywhere between $30K to $50K a month, not including bonuses. Volume was king. The more loans you brought in, the more you earned. The CEO was fond of giving away cars and cash to top earners. Ameriquest originated the "stated income loans," which trusted the borrower to state truthfully how much he or she earned. If FICO and AVM scores were high, then the loan would be granted. These types of loans would later be nicknamed "liar loans."
While running catchy commercials, Ameriquest heavily influenced government. Executives donated money to both Democratic and Republican parties with the hope of gaining access to key people in government. Legislation that could hurt their business would effectively be squashed. Despite their donations, several state governments began investigating complaints about the company. Eventually, Ameriquest settled these complaints, "agreeing to pay 49 states $325 million to settle charges that it engaged in abusive lending practices." Then, the CEO of Ameriquest's parent company became U.S. Ambassador to the Netherlands, serving under President George W. Bush.
For others who felt compelled to compete, Ameriquest's business practices opened the door to even more abusive practices. There are tales of bosses demanding that more loans be made, one even going so far as to beat an employee's desk with a baseball bat. People with dubious ethics flock to the scene. Stockholders demand more money from these companies, so they are forced to make more unwise loans. More, more, more.
And then a financier invents something called a "real estate investment trust," a type of corporation which requires the company to continuously turn 90% of its net worth over to investors. Some companies are seduced by this model; others are aghast at the idea. It would require companies to constantly feed their investors. They can never put money aside for economic downturns. REITS allowed a number of these companies to go public, but at a tremendous cost.
It's difficult to keep track of these characters and companies, but one gets the feeling that individuals aren't important. The title implies that everyone is at fault. But by the end of the book, the authors point out the real problem:
"It can be said of the mortgage/housing crisis of 2007 and 2008 that it was not caused by government deregulation. It wasn't. No major laws were changed to pave the way for what happened. But it can also be said that during the Bush years regulators didn't regulate."
Artists and authors might be repelled by all of this talk about greed and corporatism, and who can blame them. Readers will probably feel the need to take a shower after finishing the book. So let's go to the most important part of the book, a description of one of the richest men in the world, Warren Buffett. Mozilo meets with Buffett at the Embassy Suites Hotel. It was Buffett's choice.
"Mozilo was a Four Seasons kind of guy. They met for breakfast at the hotel, standing in line in the cafeteria with their trays. People were staring. (Mozilo later learned that the reason Buffett wanted to meet at the Embassy Suites was that as a frequent guest of the hotel chain he was entitled to a free breakfast once a month. This was Buffett's once-a-monther.) After breakfast they went out to Buffett's car, a Lincoln Continental. Tapes were scattered about the dashboard. 'The car was a dirty mess,' Mozilo said of the visit. The Lincoln wouldn't start. Buffett didn't have a cell phone. He called a tow truck by using a pay phone inside the hotel. Back at Buffett's office in Omaha, Mozilo noted it didn't have a computer in it."
This passage on page 119 underscores the difference between real wealth and phony money. Buffett remains the richest man in the world, according to Forbes magazine. And the rest of these "rich men" are out of business.