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Animal House, Alan Greenspan and ‘The Monster’: A Tale of the Financial Crisis

Tuesday, 23 Nov 2010 | 11:20 AM ET

The shocking revelations that some of the nation's biggest banks and mortgage companies sped through thousands of foreclosures without properly checking paperwork have raised alarm.

A new report by a congressional watchdog said the disarray could threaten major banks with billions of dollars in losses and deepen the disruption in the housing market.

One author says when we hear about all the reported shenanigans - we should hardly be surprised.

Source: amazon.com

Michael W. Hudson, a staff writer for the Center for Public Integrity and former Wall Street Journal reporter, tells in his new book THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – and Spawned a Global Crisisthis behavior is simply an extension of the primary motivation behind America’s mortgage companies – to keep profits flowing – no matter what the cost.

THE MONSTER is a behind-the-scenes look at the out-of-control behavior that fueled the financial collapse... "populated by a gang of brazen mavericks: a shadowy billionaire who created the subprime industry out of the ashes of the 1980s S&L scandal; Wall Street executives with an insatiable desire for product; struggling homeowners ensnared in the most ingenious of traps; lawyers and investigators who tried to expose the fraud; politicians and bureaucrats who turned a blind eye; and, most of all, the drug-snorting, high-living salesmen who tell all about the money they made, the lies they told, the deals they closed."

Hudson has submitted a Guest Author Blog for Bullish in which he says, "the foreclosure scandal is more than a few procedural snafus. It’s a serious problem, driven by the “anything-goes” culture of fraud that’s permeated much of the mortgage industry over the past decade." You can read his post and an excerpt from THE MONSTER by clicking ahead.

"ANIMAL HOUSE AND ALAN GREENSPAN"

Guest Author Blog
Guest Author Blog

As I’ve tried to make sense of the robo-signing, document-backdating “ForeclosureGate” scandal, a couple of things have popped in my head: Animal House and Alan Greenspan.

Stay with me here. Imagine Greenspan as Flounder, the callow freshman trying to pledge Delta House. The Delts persuade Flounder to loan them his father’s car, then take it on a spree, smash it up and return it much worse for wear. The only explanation they have for Flounder (and I’m paraphrasing here): “Hey, you messed up. You trusted us.”

Greenspan was no neophyte back in the 1980s when, between government gigs, he signed on as a consultant to Charles Keating’s Lincoln Savings and Loan. But he did seem to have a sense of innocence about him, that same free-market idealism he’d possessed a few years before when he’d penned an article in Ayn Rand’s journal declaring that no company could afford to risk its “reputation for honest dealings and a quality product” by “letting down its standards for one moment or for one inferior product; nor would it be tempted by any potential ‘quick killing.’ ”

As Lincoln Savings came under fire, Greenspan wrote a letter to regulators pronouncing the management of Keating’s S&L as “seasoned and expert.” The S&L, he said, was “a financially strong institution that presents no foreseeable risk” to the Federal Deposit Insurance Fund. Lincoln eventually perished in a conflagration of recklessness and fraud, costing taxpayers $2.66 billion.

Source: amazon.com

Now imagine Keating, before heading off to jail, taking Greenspan aside and explaining (paraphrasing again): “Hey, you messed up. You trusted me.” In the for-real world, Greenspan told the New York Times: “I don’t want to say I am distressed, but the truth is I really am. I am thoroughly surprised by what has happened to Lincoln.”

The episode didn’t seem to have much of an impact on Greenspan’s thinking, though. As Fed chairman – the Dean Wormer, if you will, of the financial system – he still maintained a certainty that markets and bankers could be trusted to protect consumers and investors from fraud and folly. His inaction during the housing boom, many critics say, allowed predatory lending and wild speculation to cripple the economy.

Greenspan is no longer in the picture. He spends his days as a sort of Professor Emeritus, explaining there was nothing he could have done to prevent what he calls a “once-in-a-century credit tsunami.” It’s hard, though, not to detect a whiff of Greenspanian idealism in the forces that have helped bring about the current controversy over the tactics used to speed the banking industry’s foreclosure machine.

Foreclosure has traditionally been a laissez faire activity. The feds have mostly left it up to the states to oversee foreclosures. Many state courts and administrative agencies, though, aren’t equipped to handle the flood of filings or to assess the propriety of the paperwork submitted by banks and other “loan servicers.”

But why worry about whether brand-name banks will do the right thing when it comes to taking away people’s homes? Don’t they want to maintain “a reputation for honest dealings”? Why would they be tempted by the potential for a “quick killing” via foreclosure – instead of, say, modifying homeowners’ loans and helping to keep the stream of income from the loans coming in?

"Greenspan is no longer in the picture. He spends his days as a sort of Professor Emeritus, explaining there was nothing he could have done to prevent what he calls a “once-in-a-century credit tsunami."" -Author, The Monster, Michael Hudson

There’s the problem.

The banks usually no longer own the mortgages they’re servicing.

The rights have been sold off, through securitization, to investors around the world. The banks still service the mortgages, but they earn little simply collecting payments from month to month. The real money is in defaults: late fees, legal fees, inspection fees. These add-ons, consumer advocates say, can total tens of thousands of dollars per loan and sink homeowners who are barely getting by so deep in default they have little chance of recovering.

Which is why, the advocates say, the honor system hasn’t worked well in terms of the Obama administration’s effort to get banks to rewrite borrowers’ loans on more affordable terms. It may also be why some banks may have given in to the temptation to flood courts with inaccurate or perjured documentation.

The evidence suggests that the foreclosure scandal is more than a few procedural snafus. It’s a serious problem, driven by the “anything-goes” culture of fraud that’s permeated much of the mortgage industry over the past decade. Solving the problem will take more than putting banks on Double Secret Probation. It will take a change in philosophy: Trust – whether among frat boys or bankers and regulators – should be earned, rather than assumed.

Michael W. Hudson, a staff writer at the Center for Public Integrityand the author of THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis

EXCERPT from THE MONSTER, "The wayward behavior didn't stop with drugs."

Book Excerpt

Reprinted by permission of the publisher, Henry Holt and Company from THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis by Michael W. Hudson. Copyright (c) 2010 by Henry Holt and Company. All rights reserved.

Bait and Switch

A few weeks after he started working at Ameriquest Mortgage, Mark Glover looked up from his cubicle and saw a coworker do something odd. The guy stood at his desk on the twenty-third floor of downtown Los Angeles's Union Bank Building. He placed two sheets of paper against the window. Then he used the light streaming through the window to trace something from one piece of paper to another. Somebody's signature.

Source: amazon.com

Glover was new to the mortgage business. He was twenty-nine and hadn't held a steady job in years. But he wasn't stupid. He knew about financial sleight of hand—at that time, he had a check-fraud charge hanging over his head in the L.A. courthouse a few blocks away. Watching his coworker, Glover's first thought was: How can I get away with that? As a loan officer at Ameriquest, Glover worked on commission. He knew the only way to earn the six-figure income Ameriquest had promised him was to come up with tricks for pushing deals through the mortgage-financing pipeline that began with Ameriquest and extended through Wall Street's most respected investment houses.

Glover and the other twentysomethings who filled the sales force at the downtown L.A. branch worked the phones hour after hour, calling strangers and trying to talk them into refinancing their homes with high-priced "subprime" mortgages. It was 2003, subprime was on the rise, and Ameriquest was leading the way. The company's owner, Roland Arnall, had in many ways been the founding father of subprime, the business of lending money to home owners with modest incomes or blemished credit histories. He had pioneered this risky segment of the mortgage market amid the wreckage of the savings and loan disaster and helped transform his company's headquarters, Orange County, California, into the capital of the subprime industry. Now, with the housing market booming and Wall Street clamoring to invest in subprime, Ameriquest was growing with startling velocity.

Up and down the line, from loan officers to regional managers and vice presidents, Ameriquest's employees scrambled at the end of each month to push through as many loans as possible, to pad their monthly production numbers, boost their commissions, and meet Roland Arnall's expectations. Arnall was a man "obsessed with loan volume," former aides recalled, a mortgage entrepreneur who believed "volume solved all problems."

Whenever an underling suggested a goal for loan production over a particular time span, Arnall's favorite reply was: "We can do twice that." Close to midnight Pacific time on the last business day of each month, the phone would ring at Arnall's home in Los Angeles's exclusive Holmby Hills neighborhood, a $30 million estate that once had been home to Sonny and Cher.On the other end of the telephone line, a vice president in Orange County would report the month's production numbers for his lending empire. Even as the totals grew to $3 billion or $6 billion or $7 billion a month—figures never before imagined in the subprime business—Arnall wasn't satisfied.

He wanted more. "He would just try to make you stretch beyond what you thought possible," one former Ameriquest executive recalled. "Whatever you did, no matter how good you did, it wasn't good enough."

"Government investigators would later joke that they could gauge how dirty a home-loan location was by the number of empty Red Bull cans in the Dumpster out back."" -Michael Hudson, Author, From, "The Monster"

Inside Glover's branch, loan officers kept up with the demand to produce by guzzling Red Bull energy drinks, a favorite caffeine pick-me-up for hardworking salesmen throughout the mortgage industry. Government investigators would later joke that they could gauge how dirty a home-loan location was by the number of empty Red Bull cans in the Dumpster out back. Some of the crew in the L.A. branch, Glover said, also relied on cocaine to keep themselves going, snorting lines in washrooms and, on occasion, in their cubicles.

The wayward behavior didn't stop with drugs.

Glover learned that his colleague's art work wasn't a matter of saving a borrower the hassle of coming in to supply a missed signature. The guy was forging borrowers' signatures on government-required disclosure forms, the ones that were supposed to help consumers understand how much cash they'd be getting out of the loan and how much they'd be paying in interest and fees. Ameriquest's deals were so overpriced and loaded with nasty surprises that getting customers to sign often required an elaborate web of psychological ploys, outright lies, and falsified papers. "Every closing that we had really was a bait and switch," a loan officer who worked for Ameriquest in Tampa, Florida, recalled. " 'Cause you could never get them to the table if you were honest." At companywide gatherings, Ameriquest's managers and sales reps loosened up with free alcohol and swapped tips for fooling borrowers and cooking up phony paperwork. What if a customer insisted he wanted a fixed-rate loan, but you could make more money by selling him an adjustable-rate one? No problem. Many Ameriquest salespeople learned to position a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower. They buried the real documents—the ones indicating the loan had an adjustable rate that would rocket upward in two or three years—near the bottom of the pile. Then, after the borrower had flipped from signature line to signature line, scribbling his consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.

At the downtown L.A. branch, some of Glover's coworkers had a flair for creative documentation. They used scissors, tape, Wite-Out, and a photocopier to fabricate W-2s, the tax forms that indicate how much a wage earner makes each year. It was easy: Paste the name of a low-earning borrower onto a W-2 belonging to a higher-earning borrower and, like magic, a bad loan prospect suddenly looked much better. Workers in the branch equipped the office's break room with all the tools they needed to manufacture and manipulate official documents. They dubbed it the "Art Department."

Reprinted by permission of the publisher, Henry Holt and Company from THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis by Michael W. Hudson. Copyright (c) 2010 by Henry Holt and Company. All rights reserved.

Email me at bullishonbooks@cnbc.comAnd follow me on Twitter @BullishonBooks

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