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Executive Times |
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2008 Book Reviews |
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Chain of
Blame: How Wall Street Caused the Mortgage and Credit Crisis by Paul
Muolo and Matthew Padilla |
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Rating: |
*** |
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(Recommended) |
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Click
on title or picture to buy from amazon.com |
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Contagion Reporters
Paul Muolo and Matthew Padilla open the series of upcoming books that will
try to make sense of the mortgage and credit crisis of 2007 and beyond. Their
new book, Chain of
Blame: How Wall Street Caused the Mortgage and Credit Crisis, provides
some overview of the conditions and systemic weaknesses that led to the
crisis, and then hone in on some specific culprits: subprime specialty
lenders and Wall Street. One particular individual, Countrywide’s Angelo
Mozilo merits special attention in the book. The authors do a good job in
showing the linkages across the globe that made this problem grow. Here’s an
excerpt, from Chapter 5, “Angelo Rising,” pp. 106-109: Any young man who grew up in
the New York metropolitan area before 1960 (and perhaps even after that to
some degree) defined himself by his ethnic heritage. Mozilo was no
different. He was Italian, and when he traveled outside his neighborhood he
was sensitive about how he was regarded. (Despite all the jokes about his
tan, Mozilo has a dark complexion.) He worked at Lawyers Mortgage in midtown
from the time he was 14 to age 21, learning the business of funding
residential loans from the ground floor up. "I worked in every single
department title, closing, and insurance. I ran the cash cage." He was
the only Italian working at the company. "Everyone else
was Jewish," he
remembers, "but I felt no discrimination." In 1960 he attended night
school at New York University while still working at the mortgage company. He
ached to be a trader on Wall Street but was concerned how he'd be treated.
"Italians on Wall Street were relegated to one thing," he said of
the time, "Jews to another, the Irish. The WASPs did the relegating. I
felt it was an uphill battle." It was that year his boss,
Edwin Katz, decided to merge Lawyers Mortgage with a Norfolk, Virginia-based
lender called United Mortgagee. The owner of the company arrived in Manhattan
to talk details with Katz. "He sees this one goy kid running around the
office,” says Mozilo. "That was me. He looks at me and says, `I want
that kid to merge the two companies: So I have to go down to Norfolk?' The
man who struck the merger was named David Loeb, who just so happened to be a
Bronx native as well. "I didn't want to go. The Bronx was gang-infested
at the time, but to go down South? I'd never left New York. I thought, why
me?" Katz offered Mozilo a deal that was hard to refuse—he offered to
pay his night school tuition. Within
a few days Mozilo, who was engaged to his girlfriend Phyllis, found an attic
apartment and began the task of combining t two firms' files and accounting
records. He returned to New York, where Loeb was now based, and declared to
his new boss, "The job's done. They're merged." He wanted to stay
in Manhattan. Instead, sine he'd done such a good job of combining the two
companies' operations, Katz told him to stay down in Norfolk and originate
"spot loans," which was the jargon used to describe
mortgages on existing houses. Loeb's business was centered around making
mortgages to buy houses in newly built subdivisions. Angelo reluctantly
complied. He
wasn't sure where to start, so he began knocking on the doors of realty
firms. "I started calling on Realtors," he said. To his amazement
he found that "no one had ever done this before" in Virginia. He
worked until two and three in the morning, and presented his bosses with what
he called "a box full of loans." They were pleased. This time they
sent him even deeper South, down to Orlando, Florida, where there was a mini
housing boom under way. With his new wife in tow—"crying all the
way" he recalled, because she, too, wasn't fond of that part of the
country—he began calling on both builders and Realtors, but this time he came
up snake eyes. "This was the deep South," he recalled. "I was
making no progress." He started to wonder if his last name and the way
he looked (a sharp-dressing Italian from New York) had something to do with
it. He
had a small office in Orlando. Across the way was an accountant who saw him
working late each night. "He was Jewish and asked me how business was. I
told him not good. He replied, 'It's because you're Italian.'" The next
week the accountant introduced him to some builders he knew who were Jewish
and happened to have developments under way in nearby Brevard County, home
to Cape Canaveral. The year before, President Kennedy had announced the
mission to the moon. Space science engineers were pouring into the area along
with their families and needed housing. "They were literally living in
tents on the beach," he said. Mozilo
got an idea: Why not finance a new subdivision to take advantage of the land
rush and make the mortgages on the homes? On the day the subdivision was set
to open models for viewing, heavy rains pounded the coast. Furniture was
floating in the models. Mozilo feared that the idea would bankrupt the
company or at the very least get him canned. (His wife was now pregnant with
the couple's first child.) But the demand for homes was so great he caught a
break. The homebuying engineers, according to the future Countrywide chief,
rolled up their pants and signed on the dotted line anyway. "They needed
a place to live," he said. "I couldn't take their loan applications
fast enough." It cemented his reputation within the company. In time, Mozilo worked his way
up to executive vice president, but never owned a stake in the firm. United
Mortgagee belonged to David Loeb and Edwin Katz. In 1968 the two men sold out
to a conglomerate. "They didn't know anything about the mortgage
business," Mozilo said of his new owners. "Among other things, they
were in the bra business." When Loeb quit in disgust with management
(over the issue of them wanting to raid the lender's escrow funds,2
as well as other differences), Mozilo hung on for a few months and then
resigned as well. He was 30 years old and had three kids. Almost immediately
he and Loeb teamed up to form Countrywide. Mozilo once again became an
advance man, but at least it was in California, whose warm, sunny climate he
quickly fell in love with. One of the first branches
Mozilo opened up for the young company was in Orange County, the future home
of Arnall's Ameriquest and countless other subprime lenders. He legged it
around Southern California highways, interstates, and boulevards looking for
shopping centers with For Lease signs. He met with landlords and negotiated
the lease contracts. In the company's formative years, he and Loeb paid
Countrywide's loan officers on commission. Soon enough he discovered that
"if the salesmen left us we'd lose business, because they took it with
them." In 1974 Mozilo was earning
$2,000 a month. His only promise of wealth, according to him, lay in whether
Countrywide could pros per. The young company had a handful of offices but
was looking to ;t expand into Arizona, Florida, and North Carolina. Loeb was
still back. in New York, serving as the firm's trader, disposing of its loans
in the k secondary
market. (The primary market is the phrase used to describe
the origination of a loan to the consumer. When a mortgage is closed and then
changes hands, it is considered a secondary market transaction.) 3 Mozilo
had a formula for opening the offices. Each would employ three to four
workers—mostly women. Mozilo will tell you that he is a happily married man.
"It wasn't what you might think," he said. There was a method to
his madness. Early on, the lender was producing only one type of loan—a
mortgage insured by the Federal Housing Administration or Veterans
Administration (FHA/VA), the federal government. "I wanted them to type
well, and women could do that," he explained. "There were a lot of
forms and a lot of typing. To process loans, they had to type. That's what I
was going after. Guys? All they wanted to do was sell, but they couldn't
type. Back then the FHA/VA did all the underwriting for you." Finding
women to "man" the offices could prove difficult. Mozilo was
driving around the state opening up new branches in towns and cities where
subdivisions were quickly sprouting up. He would conduct employee interviews
in motel rooms. "I set the interviews up in motel rooms because I was
coming into town and needed a place to stay," he said. "Sometimes,
the rooms would have suites, but not always. I had to laugh. A lot of time
there'd be men standing in the doorways, pacing. I remember one guy—I thought
he was going to lose it, hit the wall with his fist or something?' Employees
in the early offices did exactly what Mozilo first did when he arrived in
Virginia—call on Realtors because that's where the home-buying process began. The
offices that Mozilo set up did everything from taking applications to
underwriting and funding the loan. "It was a hub-and-spoke approach,"
said Mike McMahon, the Sandler O'Neill analyst who made it a point to
personally know Mozilo and study his methods. Countrywide had a four-person
office approach. "Once that office couldn't handle the volume anymore,
he'd find a new location two miles down the road and open another one to see
if they could make a go of it," he said. 2 Escrow funds include money set
aside in advance by the borrower to pay real estate taxes and insurance. The
money is held by the lender or servicer of the loan. 3 Not all mortgage originators
sell their loans into the secondary market. Some—depositories mostly (banks,
S&Ls, credit unions)—might keep the loans on the institution's balance
sheet, offsetting these assets with liabilities (deposit accounts). Secondary
market investors might include, but are not limited to, other banks,
S&Ls, Wall Street firms, Fannie Mae, and Freddie Mac. Chain of
Blame provides a good starting point for reaching an understanding of
this crisis. I expect there’s more to be said. Steve
Hopkins, August 15, 2008 |
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The recommendation rating for
this book appeared in the Seeptember 2008 issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/Chain of Blame.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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