Boiler Room

The business press is missing the crooked heart of the credit crisis
September 16, 2008

“Mr. Howard made it clear to the mortgage broker that he could not read or write, but his loan application erroneously claimed he had had 16 years of education.” —Center for Responsible Lending report, “IndyMac: What Went Wrong?” June 30, 2008

“That was your homework—to watch Boiler Room.”—Lisa Taylor, Ameriquest loan agent, quoted in the Los Angeles Times, February 4, 2005

“It was unbelievable. We almost couldn’t produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce.” —Mike Francis, executive director, residential mortgage trading desk, Morgan Stanley, quoted in “The Giant Pool of Money,” This American Life, May 9, 2008

The nation’s business press at this point must be feeling a bit like the London fire department during the Blitz, scrambling from one financial emergency to the next—a Wall Street pillar collapses here, a bank seized there—each calamity more complex and dangerous than the one before, day after day, week after week.

No sooner had the ink dried on inside-the-boardroom accounts of Bear Stearns’s collapse—in The Wall Street Journal, Fortune, even, for some reason, in comic-book form in Condé Nast Portfolio—when a new series of bank write-offs threatened the global financial system—Whoops, there goes Iceland! (See: Subprime Wave Sweeps Over Iceland, The Associated Press, April 7, 2008); venerable Lehman Brothers became a running emergency, and it was followed swiftly by crisis at Fannie Mae and Freddie Mac, the twin pillars of the U.S. mortgage market. In this environment, the second-largest bank failure in U.S. history—the discovery of IndyMac’s corpse in July—barely caused a ripple in the zeitgeist. In the face of global meltdown, what’s a few hysterical depositors running around Pasadena?

At this point, I think, business-press readers should be fairly well acquainted with the financial product known as the mortgage-backed security—its derivatives, insurance products on those derivatives, various methods of rating these instruments, the pros and cons of mark-to-market accounting, FAS 157, the role of short sellers in a post-industrial economy, etc. Put it this way: if you don’t know by now that you don’t have to actually own a collateralized debt obligation to hedge against it with a credit-default swap, well, it’s not the business press’s fault.

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Talk about more than you want to know.

As a business-press critic, then, I have been reading with no small degree of sympathy as news organizations, which themselves are on thin financial ice, try to cope with a story that promises to surpass in scope, gravity, complexity, and social and economic consequences anything this generation of business reporters and editors has ever experienced.

But, as they say on the loan-workout desk over at Countrywide Financial, sympathy only goes so far, you know?

It seems to me that well into Year II of the Panic, the business press is in the process of making the same mistake it made in the run-up to the debacle: focusing on esoteric Wall Street concerns and ignoring the simplest, most basic, but most important one—the breathtaking corruption that overran the U.S. lending industry, including and especially the brand names, and the extent to which Wall Street drove that corruption. Let’s just call it a case of over-sophistication. Its persistence, however, will only impede journalists’ ability to cover this thing going forward.

In May, The Wall Street Journal published an account by reporter Kate Kelly of the final days of Bear Stearns. The three-day series, complete with pen-and-ink illustrations, was widely praised and was followed by others, notably Brian Burrough’s account in Vanity Fair that, controversially, raised questions of whether short-sellers, aided by overheated speculation on the financial network CNBC, may have had a hand in the firm’s collapse.

My aim isn’t to choose between the two—they’re both fine—but to note that both treated the global credit panic as a given, as though it were the result of some kind of natural disaster or a particularly nasty turn in the business cycle.

I believe my former colleagues, in rushing into such high-concept fare, have underplayed a good story. Sure, we have an idea that bad practices occurred, along with bad judgment, but do we really know the sweep of it all? Since it’s just us business reporters here—just us chickens—let me illustrate what I mean with a quiz. Match the allegation with the institution. Answers are at the end of the piece.


1. Handed out copies of the movie Boiler Room as a training tape

2. Partnered to sell its “PayOption Arms” with a brokerage owned by a five-time felon, whose convictions included gun-related charges

3. Forbade loan officers to check borrower income on certain loans

4. Ran an “art department” in its Tampa office, where documents were altered

5. Settled allegations of institutionalized marketing deception that covered two million customers

6. Developed “FastQual,” a program designed to approve borrowers in twelve seconds

7. Incentivized brokers and loan officers through “yield spread premiums” and other compensation schemes to put borrowers into more expensive loans

8. Tapped two kegs of beer at weekly staff meetings


A. Citigroup

B. Countrywide

C. Ameriquest

D. IndyMac

E. Merit Financial

F. New Century

G. All of the above

This is not a take-home exam. If you don’t get more than two of seven, I think we have work to do.

This is not to say that there hasn’t been great pre- and post-crash reporting. Where do you think most of those anecdotes come from? Gretchen Morgenson of The New York Times, for one, has taken Countrywide apart, brick by brick. But it is to say that after more than a year of the mortgage panic, the business press and us readers would all do well to reflect on not only what we don’t know, but all that we do.

In many ways, it’s understandable that the business press has gotten lost in the weeds. Financial emergencies have appeared nonstop since the summer of 2007, and financial desks and newsrooms have been shrinking at the worst possible time. Meanwhile, evidence of widespread wrongdoing among lenders has emerged only in dribs and drabs—a government lawsuit here, some excellent journalism there.

And one suspects cultural problems. There does seem to be a tendency in big financial newsrooms to zoom in on esoteric stories on the margins—backdated stock options comes to mind—and ignore the big, dumb, honking ones at the heart of the financial system. In the current case, an entire industry’s business model—“selling” consumer debt—is problematic on its face. And was subprime lending ever not the domain of sleazeballs?

Whatever the problem, needlessly tentative coverage has led to a serious false-balance problem. It has also undermined an otherwise heroic post-blowup performance by the press—from those table-pounding stories about the collapse of Bear Stearns to intricate debates about the viability of monoline insurers and the credit-default-swaps market, the health of Lehman Brothers, Fannie Mae and Freddie Mac, and the creation of the mortgage-bailout bill.

Worse, from a tedium standpoint, the failure to assemble an easily gettable record has perpetuated a particularly sterile argument over who’s to blame. David Brooks, George Will, and other cultural conservatives—let’s call them behavioralists—have felt free to blame the unraveling of the financial system on some sort of spontaneous mass deterioration of public morals. Structuralists like myself, meanwhile, argue that people didn’t change, the marketplace did. Most journalists, I would argue, retreat to the mushy middle: the there-is-plenty-of-blame-to-go-around school, a theory of more generalized cultural decay that includes undisciplined lenders as well as irresponsible borrowers.

The trouble with this debate is that all the evidence is on my side. All they have is lazy musings about Woodstock and tattoos. This argument should be over by now, and I honestly believe if these cultural commentators (and everyone else) had better information, it would be.

And by the way, the Bush administration and the Federal Reserve agree with me—not with Brooks or Richard Cohen and his stupid tattoo theory of debt (Cohen linked the two in a Washington Post column mailed in on July 22). New rule changes approved by the Federal Reserve Board in July are targeted entirely at abusive lending practices—better disclosure in ads, good-faith estimates of fees, curtailing prepayment penalties, etc.—and the changes take no steps to crack down on borrower misconduct (which, by the way, did occur, but as the Fed rules recognize, is not what crashed the system).

The Federal Bureau of Investigation also suspects I’m right, having opened criminal probes of lending practices at twenty-one companies, including Countrywide, IndyMac, and other market leaders.

In any case, it’s worth briefly running through what we know to provide a foundation and framework for future reporting. It is hard to understand the global credit crisis—particularly the wreckage in the secondary-mortgage market—without pausing to consider the record of extravagant crookedness that underlies it.

As of the end of june, florida joined Illinois and California in suing Countrywide, including chief executive Angelo Mozilo. The Illinois and California complaints, particularly, provide useful windows into the gears of the subprime sales machine. The suits allege that the company, as a matter of corporate policy and on a mass scale, engaged in deceptive marketing that “misrepresented” the basic terms of loans—including what interest rates were, whether they were fixed or floating, and what fees would attach—and through changing the terms at the time of closing.

And while they are only allegations, few would argue with California when it asserts that the more onerous the terms of a loan for the borrower—e.g. higher rates, prepayment penalties, etc.—the more global bond investors would pay for it; and is it really in doubt that everyone in the loan-supply chain, including the sales force, got higher pay the more onerous the terms? Or, as California puts it: “The value on the secondary market of the loans generated by a Countrywide branch was an important factor in determining the branch’s profitability and, in turn, branch manager compensation.”

Such incentives would logically set the table for the creation of vast call centers—“loan factories,” where retail sales staff were trained in “high-pressure” sales tactics, complete with scripts, cold calls, databases, etc., to “steer borrowers into riskier loans,” as California alleges. The eighty-one-page Illinois complaint, filed June 25, similarly describes a culture in which traditional banking values were turned on their heads and were aimed overwhelmingly toward “selling” loans, which is the opposite of traditional underwriting.

From 2004, Countrywide led the market in rolling out new “products” that were basically bureaucratic ways of approving a loan to anybody. The complaint said Countrywide threatened to fire underwriters for (my emphasis) “attempting to verify a borrower’s ability to pay.

As the bank said in ads aimed at brokers:

More ways to say yes! Qualify more of your borrowers with Expanded Criteria programs from Countrywide®, American’s Wholesale Lender®. Countrywide offers some of the most flexible documentation guidelines in the industry.

Remember, this was not some fringe player. It was the firm that around 2004 was the nation’s largest home-mortgage originator. The market leader.

The complaint has plenty of examples of people blown out of homes they already owned by Countrywide products. A sixty-four-year-old widow with payments of $300 a month on a thirty-year, fixed-rate loan is put in a “3/27 interest-only loan with a fixed rate for only the first three years of the loan.” Never mind what it is; she couldn’t afford the $800 payments before the rate adjusted, Illinois says.

Perhaps she was irresponsible, as David Brooks would have it, or mad as a hatter. But Countrywide itself admitted to regulators in 2007, the complaint says, that 60 percent of borrowers in subprime hybrid arms “would not have qualified at the fully indexed rate”—that is, when the rate went up, as it inevitably did.

The mortgage mania appears to have entered its Baroque phase sometime around 2004. That year, Countrywide approved a brokerage known as One Source Mortgage, Inc., owned by five-time felon Charles Mangold, which proceeded to embark on “rampant” fraud, Illinois says, including the wholesale doctoring of loan files.

But systemic corruption—and that is the right word—has been unveiled at lenders across the board. Two of the most revealing stories on the culture that overtook the lending industry were published early—February 4 and March 28, 2005—by the Los Angeles Times. Reporters Mike Hudson and E. Scott Reckard found court records and former employees who described the boiler-room culture that pervaded Ameriquest—hard-sell, scripted sales pitches, complete with the “art department” in Tampa. Ex-employees confirmed, as did Lisa Taylor, the loan agent quoted at the top of this story, that copies of Boiler Room, the movie about ethically challenged stockbrokers, was indeed passed around as an Ameriquest training tape.

[Ex-employees] described 10- and 12-hour days punctuated by ‘power hours’—nonstop cold-calling sessions to lists of prospects burdened with credit card bills; the goal was to persuade these people to roll their debts into new mortgages on their homes.

Power hours. And if the power-hour culture pervaded the market leaders, what of smaller lenders and mortgage brokers? Here is Glen Pizzolorusso, a young sales manager at WMC Mortgage, an upstate New York brokerage, who earned—get this—$75,000 to $100,000 a month:

What is that movie? Boiler Room? That’s what it’s like. I mean, it’s the [coolest] thing ever. Cubicle, cubicle, cubicle for 150,000 square feet. The ceilings were probably 25 or 30 feet high. The elevator had a big graffiti painting. Big open space. And it was awesome. We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That’s all everyone’s talking about . . . 

We looked at loans. These people didn’t have a pot to piss in. They can barely make car payments and we’re giving them a 300, 400 thousand dollar house.

To business reporters of a certain age, boiler rooms are associated with the notorious stock swindlers of the late nineties—A. R. Baron, Stratton Oakmont—criminal enterprises all. But all the elements of the bucket shops of the past—the cold calling, the hard sell, the bamboozling of over-their-head civilians, not to mention the outright lying, forgery, and fraud in its purest form—were carried out on a massive scale and as a matter of corporate policy by name-brand lenders: IndyMac, Countrywide, Citi, Ameriquest.

“It got to the point where I literally got sick to my stomach,” a former New Century underwriter was quoted in Chain of Blame (Wiley, 2008), an early and strong effort at mortgage-crisis history by Paul Muolo and Matthew Padilla.

Of course, many individual borrowers knowingly inflated their incomes and otherwise participated in what would be their own undoing. And it is beyond question that a class of speculators took advantage of the loose lending environment and committed outright loan fraud to make leveraged bets on the housing market. Some say the borrower-shysters bear as much as 10 percent of the responsibility.

Let’s concede all that, because it’s true. My point is merely that a year into the credit crisis, the evidence is becoming overwhelming of a profound structural shift in the U.S. lending industry—one that institutionalized widespread deceptive practices and outright fraud perpetrated on borrowers. I think conservative critics of the so-called debt culture should at least factor this record into their thinking. As the business press is confronted with incredibly complex crises roiling the secondary market, it is important that this basic fact not get lost.

Though I have been critical of my former colleagues in the business press, it is important to recognize that there has been some stellar reporting that shows how the boiler-room frenzy noted above was underwritten and driven from Wall Street. Again, reporter Mike Hudson, this time at The Wall Street Journal, deserves credit for prescience, not to mention guts, for pushing through in June 2007 a revealing story (headlined The Debt Bomb—Lending a Hand: How Wall Street Stoked the Mortgage Meltdown—Lehman and Others Transformed the Market for Riskiest Borrowers) on how Lehman Brothers, in the mid-1990s, funded the retrograde First Alliance Mortgage, despite due diligence from a Lehman vice president who wrote that the mortgage lender was a financial “sweat shop” specializing in “high pressure sales for people who are in a weak state,” a place were employees leave “their ethics at the door,” etc. Lehman went on to lend the lender $500 million and sell $700 million of its mortgages.

This important story, directly linking the fates of a major Wall Street firm with one of the largest—and rankest—actors on the subprime scene, was never adequately followed. Hence, we were treated to minutia about Bear Stearns’s Alan Schwartz (who, because he “hadn’t had time for dinner, ate slices of cold pizza out of the box”), but very little about how his predecessor, Jimmy Cayne, and Wall Street colleagues, worked hand-in-glove with subprime lenders to create the crisis that created the need for tables to be pounded.

Indeed, it is surprising today to remember that most of the big Wall Street firms, to skip the middleman and so desperate for new loans to turn over, bought and expanded their own retail subprime lending operations as the boom heated: Lehman had BNC Mortgage LLC; Merrill Lynch had First Franklin; Deutsche Bank bought Chapel Funding; and so on. Bear Stearns bought Encore Credit Corp. as late as February 2007, unwinding it a few months later.

Wall Street was not just a cog in the lending machine. It was its master mechanic and chief driver. Pushed to provide higher yield to a booming debt market, it funded the most egregious of the boiler-room operations and ignored the plainly deteriorating quality of the loans—the SIVAS (stated income, verified assets); the SISAS (stated income, stated assets); the NINAS (no income, no assets)—it was selling on global markets. The mortgage story is a Wall Street story. The failure of the business press to understand and pursue this angle is so far the biggest failing in the post-crash reporting.

Yet the wall street/subprime story is gettable. I know this because I’ve seen it done. Chicago Public Radio’s This American Life did a story in collaboration with National Public Radio News called “The Giant Pool of Money,” which aired in May. A transcript of this brilliant piece, the most comprehensive and insightful look at the system that produced the credit crisis, is available online at

In a conversational, public radio-style that some might find annoying, but which I liked, the piece begins at an awards dinner, with an interview with a nervous investment banker whose collateralized-debt obligation, called “Monterrey,” is up for a CDO-of-the-year award given by a trade association.

Like a game of Chutes and Ladders, the narrative then darts down to a marine facing foreclosure because his mortgage reset raised his payments by more than $2,000 a month, then zooms back up to the head of capital-market research at the International Monetary Fund, who explains how the world’s global pool of savings, which had doubled to $70 trillion in just a few years, was under extreme pressure for higher yield as an alternative to Alan Greenspan’s super-low interest rates. Back down the listener goes to meet Mike Francis, the Morgan Stanley head bond trader quoted at the outset of this story, who explains the pressure he was under from this “giant pool of money” for product. Then we are plunged down further—down, down— into the entrails of the system of lenders and brokers in strip malls and office parks around the country, who, with increasing frenzy, burn up telephone lines hawking loans to millions of customers who have no idea what they are in the middle of.

The piece quotes Mike Garner, who was recruited as an executive at Silver State Mortgage, Nevada’s largest mortgage lender, from his previous job—as a bartender. Garner’s new job was to send guys to cruise strip malls to buy up product from brokers like Glen Pizzolorusso, the Boiler Room guy, and sell it to guys like Morgan Stanley’s Francis. Garner says he noticed that every month guidelines got looser, to the point where loan officers refused to look at borrowers’ pay stubs or W-2 forms in order to properly “underwrite” a stated-income loan.

Mike Garner: Then the next one came along, and it was no income, verified assets. So you don’t have to tell the people what you do for a living. You don’t have to tell the people what you do for work. All you have to do is state you have a certain amount of money in your bank account. And then, the next one, is just no income, no asset. You don’t have to state anything. Just have to have a credit score and a pulse.

[reporter] Alex Blumberg: Actually, that pulse thing. Also optional. Like the case in Ohio where twenty-three dead people were approved for mortgages.

Not to belabor the point, but Garner then, crucially, describes how he would sell the loans to Merrill Lynch, Bear Stearns, and the rest, who, at first, refused lower-quality loans; then one would relent.

Mike Garner: Yeah, and once I got a hit, I’d call back and say, “Hey, Bear Stearns is buying this loan. I’d like to give you the opportunity to buy it, too.” Once one person buys them, all the rest of them follow suit.

Meanwhile, back at Morgan Stanley, Mike Francis is buying the loans and feeling bad about it.

Something about that feels very wrong. It felt wrong way back when, and I wish we had never done it. Unfortunately, what happened . . . we did it because everybody else was doing it.

I realize that borrowers who signed the notes can never be fully let off the hook; no one knows what went on in the room at each closing—although the reporting of the last several years certainly yielded plenty of examples of loans made to stroke victims, the retarded, the elderly, the illiterate, and people who don’t speak English. A fine piece in April of this year by The Indypendent, a New York alternative paper, for instance, describes how an eighty-six-year-old Brooklyn man diagnosed with dementia decided it was a good idea to refinance his 5.95 percent, thirty-year, fixed-rate loan with an option ARM, an instrument that BusinessWeek described as “the riskiest and most complicated home loan product ever created.”

But more broadly, it pays to remember that the borrower is the amateur in this equation, someone who might execute a mortgage twice in a lifetime. A lender will do it a hundred times before lunch.

So, that’s what we know: the lending industry used marketing deception—including boiler-room tactics—on a mass scale against a class of financially vulnerable borrowers (which subprime borrowers are, by definition) and other middle-class financial amateurs already laboring with stagnating incomes and rising costs for health care, education, and, of course, housing.

Yet to be explored fully is the extent of Wall Street’s role, the size of the transfer of wealth between classes—from millions of civilians to thousands of professionals—that resulted, and the social and economic consequences of it all.

After that, we can we figure out what we do about it. 

Quiz Answers: 1C, 2B, 3D, 4C, 5A, 6F, 7G, 8E.
Quiz index: 1. ‘Workers Say Lender Ran ‘Boiler Rooms,’ Los Angeles Times, 2/4/05; 2. Illinois v. Countrywide, Cook County Circuit Court, 6/25/08; 3. Ferguson v. IndyMac Bank, Brooklyn federal court, 2/14/08, cited in “IndyMac: What Went Wrong?”; Doubt is Cast on Loan Papers, Los Angeles Times, 3/28/05; “Citigroup Settles FTC Charges,” Federal Trade Commission press release, 9/19/02; Chain of Blame, Muolo and Padilla, Wiley, 2008; Deceptive Ads at Bottom of Sub-prime Mortgage Crisis, McClatchy Newspapers, 8/31/07; ‘The Party’s Over at Kirkland [Washington] Mortgage Company, Seattle Times, 12/3/06)

Dean Starkman Dean Starkman runs The Audit, CJR’s business section, and is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.