Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.
This Op-Ed piece in the Sunday New York Times by James Grant makes a good point about the Federal Reserve being too quick to intervene to let irresponsible risk-takers off the hook in the subprime collapse. He applauds, rightly, Fed Chairman Ben Bernanke’s resistance to demands for broadly lower interest rates:
Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.
But on the way, Grant lets the main actors in the debacle, lenders and regulators, off the hook and perpetuates a bogus business-press truism that unscrupulous conduct is inevitable or somehow even necessary for our economy to work. I also feel that this view from 30,000 feet provides a too-convenient perspective for a business press that is often too busy cranking out flattering profiles to hold bad corporate actors to account.
Every time we have one of these meltdowns, the business press will tell us that they knew those mortgages (real-estate limited partnerships, analyst reports, tech shares, Bernie Ebbers, Adelphia, etc.) were trouble all along, everyone knew it, in fact, and besides, you know, ‘twas ever thus, or something—anything other than introspection.
To blame human nature “first and foremost” is not only not helpful; it is also a way of writing off thousands of subprime borrowers who are about to lose whatever slender equity they had on mortgages that any experienced lender knew they could never afford—mortgages that were then larded with adjustable rates, prepayment penalties and other small-print traps.
It is to say, I think, that people like these—in this case, greedy, subprime, home-buying overreachers—have always been around to get suckered on some financial toxic waste or other (anybody remember the syndicated real-estate partnerships scandal from the ’80s?), and that’s just the way it is. Wall Street and its frontmen, I mean, lenders and financial advisors, will always be there to leave the next generation of Main Street marks (borrowers, investors, insurance policyholders) wearing a barrel and straps.
After each one of these, um, investment opportunities is exposed, someone in the business press will be there to take the long view: Don’t worry, they will say, we’ve seen all this before. And we didn’t do anything about it then, either.
Grant makes an important error, I think, by putting lenders and borrowers on the same level of sophistication and therefore responsibility. That’s here:
Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments.
The view that lenders and borrowers are two equal sides to a contract misses the commonsense reality that lenders, mortgage brokers, and other professionals, who might do ten transactions in a morning, have a material advantage over borrowers, that is, the public, who might do one such transaction every ten years, if that. This is why we have truth-in-lending and other consumer protections.
The false equation also ignores a fact made explicit in yet another in a string of fine subprime stories in the Times the same day: that Countrywide Financial Corp. and other lenders violated their obligations to make loans only to qualified borrowers and used irresponsible sales tactics reminscent of “boiler-room” stock brokerages of the late 1990s.
WORKDAYS at Countrywide’s mortgage lending units centered on an intense telemarketing effort, former employees said. It involved chasing down sales leads and hewing to carefully prepared scripts during telephone calls with prospects…
If clients proved to be uninterested, the script provided ways for sales representatives to be more persuasive. Account executives encountering prospective customers who said their mortgage had been paid off, for instance, were advised to ask about a home equity loan. “Don’t you want the equity in your home to work for you?” the script said. “You can use your equity for your advantage and pay bills or get cash out. How does that sound?”
How does that sound? Sounds bad.
And it was systematic:
“The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market,” the former sales representative said.
And check this out:
Regulatory filings show that, as of last year, 45 percent of Countrywide’s loans carried adjustable rates — the kind of loans that are set to reprice this fall and later, and which are causing so much anxiety among borrowers and investors alike.
Forty-five percent of its portfolio is adjustable loans—financial time bombs, basically.
And, here we see, Countrywide was peddling its worst junk until almost the very end:
But Countrywide documents show that it, too, was a lax lender. For example, it wasn’t until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home’s appraised value and required no documentation of a borrower’s income.
In case you were wondering, an individual member of the “human race” is running this bucket shop, I mean, bank: His name in Angelo R. Mozilo, Countrywide’s chairman and CEO, who hasn’t bought a Countrywide share in twenty years, but before the crash sold them like there was no tomorrow. That’s here:
As the subprime mortgage debacle began to unfold this year, Mr. Mozilo’s selling accelerated. Filings show that he made $129 million from stock sales during the last 12 months, or almost one-third of the entire amount he has reaped over the last 23 years. He still holds 1.4 million shares in Countrywide, a 0.24 percent stake that is worth $29.4 million.
And I feel sorry here for spokesman Rick Simon:
“Mr. Mozilo has stated publicly that his current plan recognizes his personal need to diversify some of his assets as he approaches retirement,” said Rick Simon, a Countrywide spokesman. “His personal wealth remains heavily weighted in Countrywide shares, and he is, by far, the leading individual shareholder in the company.”
Got it. Thanks.
Mr. Simon said that Mr. Mozilo and other top Countrywide executives were not available for interviews. The spokesman declined to answer a list of questions, saying that he and his staff were too busy.
Busy, busy, busy.
But back to James Grant. His ultra-long view also misses a point about what is emerging as a major regulatory failure.
Late in the 1880s, long before the institution of the Federal Reserve, Eastern savers and Western borrowers teamed up to inflate the value of cropland in the Great Plains. Gimmicky mortgages — pay interest and only interest for the first two years! — and loose talk of a new era in rainfall beguiled the borrowers. High yields on Western mortgages enticed the lenders. But the climate of Kansas and Nebraska reverted to parched, and the drought-stricken debtors trudged back East or to the West Coast in wagons emblazoned, “In God we trusted, in Kansas we busted.” To the creditors went the farms.
Every crackup is the same, yet every one is different.
But, this one is different because we do have a Federal Reserve, as well as a Federal Deposit Insurance Corp. Division of Banking Supervision and Regulation, which is supposed to keep an eye on the likes of Countrywide. Where were they?
I pick on the Grant piece not for its main point about the Fed. Indeed, he offers wise counsel:
In any case, to all of us, rich and poor alike, the Fed owes a pledge that it will do what it can and not do what it can’t. High on the list of things that no human agency can, or should, attempt is manipulating prices to achieve a more stable and prosperous economy. Jiggling its interest rate, the Fed can impose the appearance of stability today, but only at the cost of instability tomorrow. By the looks of things, tomorrow is upon us already.
I take issue, however, with the assumptions that Grant uses to get us there, and how they let the business press, too, off the hook.