CORPORATE CRIME REPORTER
New
Book Points the Finger at Wall Street for Subprime Meltdown
22 Corporate Crime Reporter 30, July 30, 2008
There are a lot of culprits in the subprime meltdown.
Lenders who took risky gambles, underwriters who didn’t underwrite, regulators who didn’t regulate.
But who was holding the gas tank, throwing fuel on the fire?
Wall Street.
“They are the guys with the can of gasoline,” said Paul Muolo, the editor in chief at National Mortgage News and co-author with Mathew Padilla of the just released book Chain of Blame: How Wall Street Caused the Mortgage Credit Crisis (Wiley, 2008). “Without Wall Street, we would not have seen this huge subprime bubble. If they weren’t supplying non-banks with warehouse lines of credit at dirt cheap prices, then turning around and buying subprime mortgages so they could turn them into mortgage backed securities, and in turn turning those into collateralized debt obligations – if they weren’t so heavily involved in this business, the subprime sector would never, ever have grown to the size that it did. At one point it was 26 percent of the market. In 2005 or 2006, subprime originations were like $1.6 trillion. Wall Street was the liquidity monster here.”
The book delivers a close up account of the meltdown from two beat reporters who know the industry inside out.
They show no mercy toward Wall Street.
“Look at Bear Stearns and their subprime hedge funds,” Muolo told Corporate Crime Reporter last week. “They were incorporated in the Cayman Islands. You didn’t have to disclose anything. It was a joke. As a reporter, I couldn’t find out anything about those hedge funds, except through sources in the industry. The disclosures were abysmal. Why didn’t someone from the SEC step in and act like a Teddy Roosevelt cop to stop this nonsense?”
The feds have said that there are now 21 investigations looking at the subprime meltdown. But Muolo is skeptical that the feds will reach into the executive suites of the bigger lenders or brokers.
“There is a lot criminality on the street level, where the loans were originating,” Muolo said. “They were doctoring people’s income. But there were so many thousands and thousands of cases. We’ve heard anecdotally where gardeners or dishwashers were making $15,000 a year. And their income suddenly got upped on the mortgage application to $40,000. There were a lot of those kinds of abuses going on. But do you think the FBI is going to spend its time prosecuting 10,000 individual cases of loan fraud? I don’t think so.”
Muolo actually got to know Angelo Mozilo, the founder and CEO of Countrywide Financial, the largest of the mortgage lenders.
And Muolo thinks Mozilo’s biggest mistake was getting into subprime. It was a mistake that was to take down Countrywide and humiliate Mozilo.
In the book, Muolo tells the story of how, during one interview, Mozilo started lashing out at the regulators, the prosecutors, and the press for going after Italian American businessmen.
“They went after Quattrone Nardelli, Grasso,” Mozilo said. Muolo said that Mozilo named a few others that he didn’t recognize.
“I was shocked when he told me that,” Muolo said. “I stopped and said – you don’t really mean that? He paused. And he said – yes. He was suffering from the bad press. He had had it. He was grasping at straws.”
Muolo thinks that the Clinton administration’s repeal of the Glass-Steagall law, which separates the banking industry from securities industry – helped lay the groundwork for the current meltdown.
“If they hadn’t ripped down Glass-Steagall, which separates the banking industry from the securities industry, you would not have had Wachovia, Citigroup and all of the other banks underwriting subprime bonds,” Muolo said. “Citigroup could have never ever entered that business if they hadn’t ripped down Glass-Steagall. And look at the $40 billion in losses that they suffered. People forget – Merrill Lynch, Morgan Stanley, Bear Stearns – they all owned depositories. And they put some of their subprime bonds on their balance sheets of the depositories. If they had never ripped down Glass-Steagall during the Clinton administration, that would have created quite a few hurdles for this subprime market. I think they should put up Glass-Steagall again, but I’m not going to get my wish on that one.”
[For a complete transcript of the Interview with Paul Muolo, see 22 Corporate Crime Reporter 30(11), July 28, 2008, print edition only.]
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