Chain Of Blame How Wall Street Caused The Mortgage And Credit Crisis

Posted In: Current Mortgage Rates

Deanne Rushia says...

An easy & engaging read.It connected most, if not all, of

the financial dots for me.

Posted on February 23, 2011

Valene Sjolander says...

From a quantitative perspective, to sort through the current "mortgage mess" would take an intense effort, requiring a large number of researchers and computer time. No one has performed this kind of analysis as of yet, but there have been quite a number of individuals who have given anecdotal and semi-historical accounts of the turmoil in the credit/mortgage markets in the last few years. This book is an example, and within its covers the reader will discover a purely narrative account of the mortgage markets, with most of the pages devoted to those individuals that the authors believe played a major role in moving or even dominating these markets. There is of course an obvious danger in giving such a narrative account: it imputes market expertise to these individuals at a level that cannot be justified, given the complexities of the financial markets. No individual, whether a low-level analyst or the chief executive officer of a major mortgage firm, has the intellectual capacity or market savvy to describe or move the markets to a degree that is typically reported in the popular and financial press. Such individuals may think they do, and their actions and boasting reflect the mental confabulation that they have fallen prey to, but at best they have a limited picture of financial dynamics, and whatever monetary success they have is due to events that are completely out of their control. Many authors and reporters though have succumbed to an unjustified admiration as regards the senior management of financial firms, wherein they have assumed, falsely, that those who occupy the top echelons of the company hierarchy have special insight or knowledge into financial events that others do not. Frequently these managers are given accolades and awards for this expertise, thus exacerbating the excess of veneration devoted to them. And some managers assume that their orders or advice is followed to the letter, forgetting that those lower in the hierarchy typically follow their own ways of doing things, even though they give the impression that they are following these orders in the exact form in which they are given. The effect of all this is to muddy the waters as to whose expertise is really responsible for the success of the firm: in reality it is due to the actions of many workers and managers whose judgments and workflow become entangled with each other (or "synergistic" as many sociologists say), thus making it very uncertain as to what factors or decisions played the predominant role.



But in spite of the uncritical adulation sometimes shown towards individuals such as Angelo Mozilo, Henry Paulson, and Stanley O'Neal in this book and others, its authors have given readers a good general overview of how the mortgage business functions and how in the last few years the character of its operations have departed dramatically from the past. Indeed, the reader will learn about loan origination, mortgage-backed securities, and the most important credit risk variables. Readers who have not worked in the mortgage business may be very surprised to learn of the processes that can actually occur from loan origination till the time the loan is packaged into a mortgage portfolio to be sold in the secondary market. Readers will also obtain a better understanding of the role played by brokers and "correspondents" in bringing loans to life and the possible impact they had on the current difficulties in the mortgage markets.



A mere chronology of the mortgage markets of the last few years might prove boring to some readers, so to make the book more entertaining the authors chose to give brief biographies of some of the chief executives of the mortgage companies and to describe some of the reward systems that were put in place to recognize those account executives (AEs) that brought in a large volume of loans (regardless of their risk quality). Cars and gifts of every sort were given along with drunken parties on tropical cruises. Apparently drinking oneself into a stupor on one of these cruises was considered a desirable reward for bringing in new mortgage business to the firm. In addition, the authors can't help but mention how the mortgage broker population was predominantly female and how "attractive" they were, and pointed out that two executives of one mortgage firm divorced their wives and married two of these "attractive" female employees. One wonders to what degree these over-painted broker-nymphs were responsible for the eventual credit losses in the firms in which they did business with.



Pointing out this kind of frivolous hiring practice does have value for the reader however, as it grants insight into just how lackadaisical some of the management was before the heavy losses began to occur in the third quarter of 2006. As another example of this which is not discussed in the book, in the home equity division of one major bank an individual with over thirty years of experience in quantitative modeling was interviewing for a position in credit loss forecasting and modeling some months before the bad news started pouring in: at a time when profit margins were soaring and there was giddiness about the future. The head of this division dismissed the need for such experience and ranted on about how his group did not really do modeling, the emphasis instead being on developing new marketing ideas for the bank. He then went on a tirade about how he thought the makers of Yellow Tail wine had the most brilliant marketing campaign in history. The modeling of mortgage credit risk was not even discussed at all. The interviewee was then given an IQ test, as if his involvement in thirty years of mathematical modeling was not suitable proof of his ability. He was not hired, but instead, someone with two years experience in the economics of dairy cows filled the position (and he was not required to take the IQ test).



These anecdotes illustrate the "take nothing seriously" attitude that was prevalent in this bank in the months preceding the onslaught of huge credit losses in mortgage portfolios. Readers of this book who have worked in the mortgage industry will be familiar with this silliness and the false confidence displayed by management at this time. Some have reported their experiences in a few of the Web sites that the authors mention in the book. Some of what the authors include in the book, along with that reported on these Web sites, is just gossip and no doubt serves as a catharsis for frustrated and conscientious employees, but it does grant the reader insight into the mood of the mortgage business in the last few years. The authors also report historical parallels of these attitudes, such as those prevailing before the savings and loan fiasco in the late 1980's. One such attitude is that of Ronald Reagan where he is reported as saying that "I think we've hit the jackpot" when signing the Garn-St Germain bill. It is very disconcerting to learn that the president of the United States views economic transactions as essentially gambling, with the consequent rush in emotions when one "hits the jackpot." But Reagan's happy-go-lucky attitude and his phony commitment to deregulation and laissez-faire economics was exposed just a few years later: the U.S. government bailed out the savings and loan sector while Reagan was still in office.



The authors use the savings and loan fiasco as an example of how things can go completely amok when an economic sector is suddenly deregulated, and how the Washington peddlers of influence can pretend to be in favor of free markets but instead game the system to favor themselves and a few others in their cabal. The authors report the savings and loan fiasco as costing the taxpayers $150 billion: tax dollars extracted from them coercively by those in government at the time who preached about the moral and economic superiority of the "free market".They love "free markets" as long as they do not cost them money. If they do, they quickly use government resources and regulation to "help" the consumer and "stabilize" the economy, masking their real intentions of protecting their economic status and that of their financially incompetent buddies. Put out on their own to compete in a truly free market without the arbitrary and capricious assistance of the federal government, this gang of moochers would fall flat on their faces.



And then there are the mortgage brokers: those individuals who earn a fee by bringing loans to the lending institution. They work in symbiosis with the "account executives" of the lending institution, the latter of which are rewarded according to the volume of the loans they bring in. And as the authors give much anecdotal evidence for, the word "volume" encapsulated the predominant lending philosophy in the months and years before the heavy losses began to occur. The risk characteristics of each loan that the broker presented to the account executive were for the most part completely ignored. There was no coherent risk management policy except one: Volume, Volume, Volume, Volume, Volume.



The authors allude in passing to the need for a way of judging the goodness or badness of a broker. There are many ways to do this, and these methods are commonly called "broker scores" in analogy to the credit score that is routinely assigned to credit consumers. In one major U.S. bank for example, such a broker score was developed and presented to the management of the home equity division and to representatives of the OCC, the latter of which viewed it favorably. The sales force, which judged a broker's worth by the volume of home equity loans they brought to the door, dismissed it however as "too subjective." They preferred to accept the loans as they were, ignoring completely their risk characteristics. The broker scoring methodology was presented in January 2007, and only eleven months later, due to the astronomical losses exhibited by broker loans, the entire broker channel was dismissed from the home equity division of this bank. Most of the sales force and account executives followed them to the streets, where many, a large volume in fact, are still pounding the pavement looking for employment.



The authors have thus given a good narrative, albeit supported by anecdotal evidence, of the events behind the current mortgage and credit crisis. At the present time, Fannie Mae and Freddie Mac are due to be bailed out by the federal government of the United States, and IndyMac has been taken over by the FDIC (and the latter institution it has been learned engaged in a little speculative activity in a past takeover of another bank). The subprime pool of mortgages has dried up, and structured securities have been blamed as a major culprit in the crisis. Housing prices in many locales are plummeting, and a mortgage bailout bill is likely to pass the House and Senate. So will any lessons be learned from these events and the narrative given in this book? This seems unlikely now as it was after the savings and loan crisis. It would take a gargantuan effort from the members of the populace to rid themselves not only of the irrational individuals who populate the governmental hierarchies and monetary regulatory agencies, but also to once and for all rid themselves of the excess of veneration paid to those who head the financial centers of the world. The authors of this book were correct when they wrote that Angelo et al could not do anything about the mortgage meltdown when it started occurring. They cannot do anything about it when times are bad nor should they be asserted to be financial wizards when times are good. They are ordinary human beings who do not possess any special insight into the vastly complex financial markets of the twenty-first century.

Posted on February 23, 2011

Rosana Czepiel says...

Do your eyes glaze over when commentators try to describe the financial products that were at the heart of the recent real estate boom? The mortgage boom?This book described the instruments clearly--and gives the reader a great sense of what was fundamentally wrong with the whole process.The title is "Chain of Blame," but there is plenty of blame to go around.



The book is well written and lucid. Nonspecialists can understand it well.I heard talking heads on TV and radio described tranches, REITs, "liar loans," "warehouse line of credit," and so on.The authors describe these terms--and others--clearly and in such a way that the reader can begin to see what had happened--and why the meltdown in the mortgage world should not be seen as so surprising.



It is also the story of clever businessmen and women, who could develop new tools for investment from subprime loans. Subprime loans, simply, are (Page 325): "A loan originated by a lender that is A- to D in quality. Consumers with the best credit ratings. . .are considered 'A' credit quality." In short, loans are being made to purchasers who carry some to a lot of risk.If they can't keep paying their mortgages, the house of cards can fall down.And that is, in short, what happened (although the story is quite a bit more complex than that).



Among the innovators were pioneers such as Roland Arnall (of Ameriquest and Argent) and Bill Dallas (of Ownit Mortgage Solutions).Then, those who adopted practices of the innovators, such as Angelo Mozilo of Countrywide.



The book makes pretty clear that a number of factors contributed to the mortgage problem.Regulators didn't get involved; Wall Street firms ignored the volatile nature of subprime loans in a desire to realize enormous profits; banks bought into the profitable business.



Anyway, if the reader wants a well written, if not overly deep, analysis of the mortgage crisis, this is not a bad place to start.

Posted on February 24, 2011

Juliana Cabaniss says...

Well written, well researched and has the juicy stuff too.A broker standing on his desk yelling at the loan reviewers to go faster, faster, faster in approving loans (so he can get his commission).Great background on Angelo Mozila, the king of subprime, and a fun story about Lewie Ranieri, whose Texas employees thought they were getting a mob boss instead of a banker.



It will make you laugh, and make you cry because government has given away the bank to the crooks again.These crooks are in suits and rob all of us with a pen.U.S. taxpayers, investors, and pension funds will be trying to choke down these bad loans and ABSs for a long time.

Posted on February 24, 2011

Rivka Carleton says...

The authors of this book present a detailed study of the nexus that existed between the unregulated(the Securities and Exchange Commission(SEC)hasn't been doing its regulatory job ever since Bill Casey left)Wall Street investment banks(Bear Stearns,Merrill Lynch,Morgan Stanley,Goldman Sachs,Lehman Brothers,Credit Suisse,Deutsche bank,etc.),commercial banks(Free market believers Alan Greenspan and Ben Bernanke,Milton Friedman's best student,were supposed to be regulating the commercial bankers when they were chairman of the Federal Reserve Board.They were doing nothing of the sort because they believed that the financial markets would regulate themselves)like Wachovia and Bank of America,Savings and Loans like Washington Mutual,mortgage brokers, bond rating agencies, underwriters ,and mortgage lenders like Mozilo's Countrywide, were able to peddle some 6 trillion dollars worth of highly speculative and extremely risky bonds backed by sub prime mortgages all over the globe .It provides another view into this problem that is similar to the very recent books by Morris(The Trillion Dollar Meltdown)and Phillips

(Bad Money).Warren Brussee's 2004 book,though mistitled,is the first full scale treatment of the sub prime loan problem.

I have deducted 1 star because the authors do not provide any historical overview that would enable the reader to see that this problem is a systemic one that repeatedly occurs over and over again throughout history whenever financial ,short run, profit maximizing(sales maximizing)companies are allowed to engage in speculative activity that is financed by the banks themselves.It is the private ,profit maximizing commercial banking system that supplies the loans that enable operators like Moziloto leverage their debt position in the financial markets and create bubbles.These bubbles are then pumped up and inflated by the banks.This leads to manias(crowd and herd cascading impacts),panics,crashes,and recessions,as well as inflation and/or stagflation.



Adam Smith warned about this in his The Wealth of Nations(1776;see pp.339-340 of The Modern Library(Cannan)edition for Smith's conclusions.His entire discuusion of banking on pp.250-340 is the best ever written).The purpose of an independent central bank is to PREVENT the private commercial bankers from making loans to projectors(the speculators and rentiers of Keynes's General Theory(1936)) ,imprudent risk takers,and prodigals.Loans are to be made only to the sober people who will use the loans to create businesses and jobs,as opposed to speculation and bubbles that must eventually collapse, creating great social costs for society as a whole.



An entire stealth banking system has come into existence over the last 30 years since Jimmy Carter started his ill advised deregulation and privatization policies of the financial system.These policies were speeded up during the Reagan -Bush administration .This book exposes what the inevitable result of such a deregulated financial system ends up requiring-massive tax payer bailouts and/or special loans made available to speculator bankers at very low rates of interest .

Posted on February 25, 2011

Sammie Prather says...

We can better understand our mortgage and financial crisis by understanding human nature.Muolo's and Padilla's story unfolds from the point of view of the actual participants.They show us that what we thought was a vibrant financial system was actually a flimsy stack of cards created by irresponsible people, so that when those at the bottom, the borrowers, stopped paying their mortgages, the house of cards collapsed.



Who's to blame?Everyone, especially the proponents of deregulation.



Who are the biggest losers?Taxpayers, who will bail out those who were deregulated.

Posted on February 25, 2011

Theodora Saroop says...

This book points fingers and names names and it is high time someone did that.The authors know their subject and the book is well researched and readable.I recommend this, even to someone who is new to the topic.

Posted on February 26, 2011

Margaret Gutzwiller says...

As our country is facing the most severe economic situation since The Great Depression, this book is a perfect read for those who would like to learn how it all happened. The author says that the capital markets - Wall Street - failed us. He explains the series of events in understandable language.



There is not one individual or organization to blame for the crisis. It is more the combination of individuals and organizations working together. They all focused on only one thing: making money. Wall Street innovated mortgage-backed securities, which allowed more and more money to be allocated toward the housing market. Mortgage companies, wanting to make more money, worked really hard to find borrowers. When good quality borrowers were scarce, they went after less credit-worthy ones. Once these customers defaulted in large numbers, home prices started to fall and the recession began. This book is very educational.



- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

Posted on February 28, 2011

Celestina Plue says...

This book clearly spells out what went wrong to precipitate the mortgage crisis that catapulted the financial markets into a global meltdown.The book uses simple language to describe complex concepts, which is very helpful to the financial novice like myself.In this sense, this book is wonderful.



However, the book is way too long.Some whole paragraphs are repeated almost verbatim in different chapters.Each paragraph chronicles the life and times of another major mortgage company.While this concept is ok for telling stories about the individuals involved in the business, it makes for highly repetitive reading, as the mistakes made by one company are often made by others.The first 150 pages is a tough slog of similar people and similar stories, but the book picks up steam in the final 150.



Finally, while this book does a great job of explaining the mortgage industry and their role in the financial crisis, the authors make a cursory explanation of what truly happened on the Wall Street side of things.(This isn't too unexpected because the authors are mortgage experts.)For example, there is basically no mention of the subsequent credit crunch that was precipitated by the sub-prime mortgage disaster.



For a good explanation of what went wrong on the Wall Street side of things, I recommend 'The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash'.That book is not an easy read, because the author expects the reader to have a solid understanding in Wall Street lingo.But 'Chain of Blame' is a useful primer.

Posted on February 28, 2011

Jane Grosskopf says...

This book in great detail tells the tale of the subprime bottom feeders and their links to equally greedy and bottom feeders on Wall Street. It's easy to read, and you start to understand how these loans were made-- quickly and without much regard to whether people could actually repay them. I would have liked to see the "chain" completed, however. We don't hear much about the home buyers and what they did or what happened to them--were they all deadbeats, as some say, or hapless naifs? And, at the other end, what were regulators doing? Surely, they must have had some thoughts about what was going on. I know at the time that consumer groups were screaming their heads off, and a few state legislatures tried to pass better regulations--but they were pre-empted from implementing them by the Office of Thrift Supervision an the Office of the Comptroller of the Currency. Of course, if the authors had covered all that, their book would have been bigger than the phone book, and they would still be writing. All in all, though, I thought it was riveting.

Posted on March 3, 2011