John Wiley & Sons, Inc. Chain of Blame How Wall Street Caused the Mortgage and Credit Crisis Paul Muolo Mathew Padilla ffirs.indd iiiffirs.indd iii 6/3/08 8:45:00 PM6/3/08 8:45:00 PM ffirs.indd iiffirs.indd ii 6/3/08 8:44:59 PM6/3/08 8:44:59 PM Chain of Blame ffirs.indd iffirs.indd i 6/3/08 8:44:58 PM6/3/08 8:44:58 PM ffirs.indd iiffirs.indd ii 6/3/08 8:44:59 PM6/3/08 8:44:59 PM John Wiley & Sons, Inc. Chain of Blame How Wall Street Caused the Mortgage and Credit Crisis Paul Muolo Mathew Padilla ffirs.indd iiiffirs.indd iii 6/3/08 8:45:00 PM6/3/08 8:45:00 PM Copyright © 2008 by Paul Muolo and Mathew Padilla. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HG5095M86 2008 332.7'20973—dc22 2008021463 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd ivffirs.indd iv 6/3/08 8:45:01 PM6/3/08 8:45:01 PM v Contents Acknowledgments vii Introduction ix Cast of Characters xi Chapter 1 Angelo Speaks, the Worldwide Contagion Begins 1 Chapter 2 The Repo Man Meets the Bald Granny: A Short History of Subprime 23 Chapter 3 The Death of the Bailey Building and Loan, the Rise of Millionaire Loan Brokers and Countrywide 47 Chapter 4 The Beach Boys of B&C: How Roland Arnall Became the Johnny Appleseed of Subprime 73 Chapter 5 Angelo Rising: The Son of a Bronx Butcher Makes Good 103 Chapter 6 The Holy Roller of REITs 127 Chapter 7 The End of the (New) Century 149 ftoc.indd vftoc.indd v 6/3/08 8:45:50 PM6/3/08 8:45:50 PM vi contents Chapter 8 A Conspiracy by Merrill? 179 Chapter 9 A Warning from Lewie: CDOs, SIVs, and Other Things No One Understands 205 Chapter 10 Deep in the Belly of the Bear 227 Chapter 11 Armageddon Times: The Tan Man Departs, Bye-Bye Bear 249 Chapter 12 What the Hell Happened? Ten Bad Years for Housing in America 277 Afterword We Buried (Some of ) Our Garbage Overseas 305 Source and Interview Notes 309 Glossary 319 About the Authors 327 Index 329 ftoc.indd viftoc.indd vi 6/3/08 8:45:50 PM6/3/08 8:45:50 PM vii Acknowledgments T his book was a year in making, longer if you count the early reporting we did before subprime became a household word. There are more people who deserve our gratitude than space allows. First among them are our families: Paul ’ s wife Ann, daughters Sherry and Katherine, and his parents Louis and Norma; Mathew ’ s wife Lucia, daughter Anna, and mother Geri. Without their support the long nights of fact checking and reinterviewing sources would not have been possible. High also on our list is our agent, Denise Marcil, and her col- league, Michael Congdon, as well as John Wiley & Sons editors Emilie Herman and Debra Englander, who believed in this project early on, encouraging us to move forward. Specials thanks to Tim Murphy, publisher of National Mortgage News , and especially the senior editorial staff — Mark Fogarty, Bonnie Sinnock, Brian Collins, Ted Cornwell, and Bradley Finkelstein — who patiently excused Paul ’ s absences from the Washington offi ce when news was breaking all around (especially Brian). And special thanks to flast.indd viiflast.indd vii 6/3/08 8:45:30 PM6/3/08 8:45:30 PM Andras Malatinszky, who three years ago talked Paul into writing a Web column that resulted in numerous leads and new sources. Matt would like to thank Orange County Register editor Diana McCabe and former Register editor Glenn Hall, now editor of TheStreet.com, for their patience and understanding while working on this book, as well as for their strong mentoring. He would also like to acknowledge the fi ne reporting on the subprime meltdown by Register colleagues John Gittelsohn, Ronald Campbell, Jeff Collins, Andrew Galvin, and Mary Ann Milbourn. Matt would also like to thank Orange County Business Journal editor Michael Lyster for turning him on to the sub- prime industry and editor Rick Reiff for his early teachings. A special hats off to the late Stan Strachan, who taught Paul eve- rything he knows about reporting. Also, a nod to Brenda White, who started down this road with us but for personal reasons had to abandon the project. And fi nally, our gratitude to the many whom we could not name in this book: the contract underwriters who worked for Clayton Holdings and the Bohan Group, the mortgage executives who sold loans to Wall Street, and some of the managing directors on the other side of the table. All spoke to us at the risk of their careers. viii acknowledgments flast.indd viiiflast.indd viii 6/3/08 8:45:30 PM6/3/08 8:45:30 PM [...]... appalled by the audacity of both legitimate businessmen (real estate developers mostly) and con artists who were allowed to own S&Ls and treat them like their own personal piggy banks The S&L crisis led to the indictment of hundreds of men (and a handful of women) Dozens went to prison Others walked Angelo lobbied me on one point, and he said it almost every time we talked about the S&L crisis that the criminality... because the Street controlled the mortgage bond business, where most of the money for home lending came It was in the Street s best interests I wasn’t so sure I became even less sure when the losses (the nice word being write-downs) at banks and Wall Street firms topped $300 billion in the spring of 2008 To me and my co-author, Mathew Padilla, something had gone awry A million or so people had lost their... between the chief executive of cer and the Wall Street community is a delicate kabuki where bad news is often couched in somber tones and fuzzy adjectives to soften the blow But don’t tell that to Angelo Mozilo the Bronx-born, perpetually tanned CEO and co-founder of Countrywide Financial Corporation, America’s largest home mortgage lender On July 24, 2007, the 68-year-old Mozilo and eight of his senior... about the housing and mortgage markets To many on the other end of the line Mozilo was more than just the co-founder of an almost 40-year-old company, one he had built from scratch after starting out his career as a 14-year-old runner delivering documents and bank checks around Manhattan, Brooklyn, and Queens, hopping buses and subways to keep the costs down for the midtown lender he worked for In the. .. Jackson: director and manager of Metropolitan Money Store, a foreclosure “rescue” company Russell and Becky Jedinak: The husband -and- wife team that managed Guardian Savings and later on Quality Mortgage James Johnson: chairman and CEO of Fannie Mae; friend of Angelo Mozilo Gary Judis: chief executive of cer of Aames Financial Stanford Kurland: president and chief operating of cer of Countrywide who... dollars’ worth of subprime mortgages from nonbank lenders, securitizing them, and then resecuritizing them into CDOs, selling some of them overseas Almost every mortgage they put into a bond was a loan made to a borrower who either had bad credit or was considered a statedincome risk Stated-income mortgages worked like this: The borrowers stated their income and the lenders believed them It was a wildly... put-on-your-best-face kind of guy His ability to cut through the malaise of the situation (or as he would call it, the bullshit”) was what endeared him to analysts, certain competitors, and definitely members of the media Mozilo told the audience on the other end of the line without hesitation, “We are experiencing a huge price depression, one we have not seen before—not since the Great Depression.” The. .. years away Sitting at their desks on the other end of the phone, watching blinking computer screens, that wasn’t the kind of reassuring talk that equities analysts wanted to hear An analyst asked a question of another Countrywide executive, and then Mozilo butted in at the end of the executive’s answer If anything, he wanted to make sure that these folks on Wall Street fully understood the situation He... Cioffi, who was in charge of the hedge funds, boiled down to this: Bear Stearns was bullish on the future of housing, and subprime in particular But Bear Stearns wasn’t the only investment banking firm playing the subprime game The biggest names on Wall Street Citigroup, Lehman Brothers, Merrill Lynch, and Swiss investment banker Credit Suisse—were all doing the same thing They were buying billions of. .. I co-wrote about the savings and loan (S&L) crisis of the late 1980s and early 1990s, Inside Job: The Looting of America’s Savings and Loans He had read the book, admiring its detail and its financial ix flast.indd ix 6/3/08 8:45:30 PM x introduction morality tale—a story about so-called honest businesspeople who took advantage of newly passed laws that allowed them to loot federally chartered S&Ls . www.wiley.com. Library of Congress Cataloging-in-Publication Data: Muolo, Paul. Chain of blame : how Wall Street caused the mortgage and credit crisis / Paul Muolo, Mathew Padilla. p. cm. Includes. John Wiley & Sons, Inc. Chain of Blame How Wall Street Caused the Mortgage and Credit Crisis Paul Muolo Mathew Padilla ffirs.indd iiiffirs.indd iii 6/3/08. to own S & Ls and treat them like their own per- sonal piggy banks. The S & L crisis led to the indictment of hundreds of men (and a handful of women). Dozens went to prison. Others walked.