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Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis
An updated and revised look at the truth behind America's housing and mortgage bubbles
In the summer of 2007, the subprime empire that Wall Street had built all came crashing down. On average, fifty lenders a month were going bust-and the people responsible for the crisis included not just unregulated loan brokers and con artists, but also investment bankers and home loan institutions traditionally perceived as completely trustworthy.
Chain of Blame chronicles this incredible disaster, with a specific focus on the players who participated in such a fundamentally flawed fiasco. In it, authors Paul Muolo and Mathew Padilla reveal the truth behind how this crisis occurred, including what individuals and institutions were doing during this critical time, and who is ultimately responsible for what happened.
Discusses the latest revelations in the housing and mortgage crisis, including the SEC's charging of Angelo Mozilo Two well-regarded financial journalists familiar with the events that have taken place chronicle the crisis in detail, showing what happened as well as what lies ahead Discusses how the world's largest investment banks, homeowners, lenders, credit rating agencies, underwriters, and investors all became entangled in the subprime mess Intriguing and informative, Chain of Blame is a compelling story of greed and avarice, one in which many are responsible, but few are willing to admit their mistakes.
In the summer of 2007, the subprime empire that Wall Street had built all came crashing down. On average, fifty lenders a month were going bust-and the people responsible for the crisis included not just unregulated loan brokers and con artists, but also investment bankers and home loan institutions traditionally perceived as completely trustworthy.
Chain of Blame chronicles this incredible disaster, with a specific focus on the players who participated in such a fundamentally flawed fiasco. In it, authors Paul Muolo and Mathew Padilla reveal the truth behind how this crisis occurred, including what individuals and institutions were doing during this critical time, and who is ultimately responsible for what happened.
Discusses the latest revelations in the housing and mortgage crisis, including the SEC's charging of Angelo Mozilo Two well-regarded financial journalists familiar with the events that have taken place chronicle the crisis in detail, showing what happened as well as what lies ahead Discusses how the world's largest investment banks, homeowners, lenders, credit rating agencies, underwriters, and investors all became entangled in the subprime mess Intriguing and informative, Chain of Blame is a compelling story of greed and avarice, one in which many are responsible, but few are willing to admit their mistakes.
400 pages, Paperback
First published January 1, 2008
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196 people want to read
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Displaying 1 - 19 of 19 reviews
April 16, 2012
Truly a fascinating account of the financial meltdown. It also contains one of the clearest explanations of credit default swaps and collateralized debt obligations I have seen anywhere else. A big problem was that sub-prime mortgages had become a cash cow for Wall Street. Mortgage entities like Countrywide sought out subprime mortgages because they brought higher interest rates, could be collateralized with real estate, and then could be securitized and resold and then added to CDOs which were insured again. At each step of the process, especially as the bonds got larger and larger, the fees collected by the agents and sellers got bigger and bigger and huger and huger. And no one worried because real estate never went down, right? At least not since the great Depression, right? And they were all insured, anyway, right? And we're making so much money. Right.
It astonished me to see the effect language could have on the market which then cascaded into larger problems. When the president of Countrywide said in 2007 he didn't think we would pull out of the recession until 2009, shudders ran through Wall Street, and when he actually used the word depression, it tumbled head-over-heels. By that time Countrywide had 15% of the market for subprime mortgages and wanted 20%. They were making sooo much money. Then he opened his mouth and the slide began.
Again, there were many causes for the current crisis and some resulted from unintended consequences. For example, in 1986 Reagan and Congress pass the Tax Reform Act that eliminated the tax deduction for personal finance interest on credit cards, car loans, etc. It was a subtle kind of tax increase and was intended to raise revenue and lower the deficits. That's what happened at first until mortgage finance companies realized they could promote second liens on homes by loaning money on the increased equity of homes. All would go well assuming that houses increased in value. Some finance companies even made loans on 125% of a home's value.
The advent of loan brokers was another contributing factor. These were folks who acted as intermediaries between the borrower and the finance company (by this time finance companies had eclipsed banks and savings and loans as mortgage originators, primarily because they could charge more interest since they were not regulated the way banks were.) The problem was that brokers made money by financing and refinancing. It was in their interest to get homeowners to constantly refinance because their only source of income was generated as points on the loan. This made predicting income over the life of a loan very difficult and the securitization of the loans was based in part on expected performance of the loans, which became almost impossible and was wildly optimistic.
Ironically, in another of those unintended consequences, the closing of numerous savings and loans after the S&L crisis threw many experienced mortgage managers and brokers out looking for jobs and places like Country-Wide snapped them up. Of course, they had to start writing mortgages. Another was the California Nolan Act, passed in 1983, that permitted federally chartered S&Ls to invest 40% of their assets in non-residential real estate. Entrepreneurs and developers would purchase an S&L and then use its capital to fund their own building projects. Nolan had been a pal of many S&L executives, and his act opened the door for unscrupulous folks to channel consumer savings into all sorts of projects. S&Ls began to fall like dominoes.
All of the constituent parts of the current crisis were available to review had anyone taken the time to look at the S&L crisis: deregulation of a successful business but one seen as under-performing, interference with regulators by Congress, federal subsidization of loans, reduction of the number of regulators, media cheer-leading (CNBC was then called the Financial News Network, but the role changed little), and finally collapse and massive government bailout: $150 billion in 1980 dollars or the equivalent of about $450 billion today. (Sound familiar?)
I often hear from my conservative friends that if it weren’t for those people getting mortgages they couldn’t afford, we wouldn’t be in this mess. So let’s see. You go to a mortgage lender (bank’s were in the minority in offering mortgages,) because you’ve seen an ad on television. The lender asks how much money you want for your house. You tell him/her. They ask how much you earn. You state what you earn. And you get the loan. So who’s the idiot in this scenario? The person asking or the lender loaning? Lenders would forge appraisals to get higher values for the houses since the higher the mortgage the bigger the fee. And they certainly did not care if the mortgage was repaid since they were sold and securitized immediately.
Here’s how it worked at one company: New Century. Started by four out-of-work executives (they moved a wall so that each would have exactly the same size office since they gave each of themselves the title of President and CEO) they created a business specializing in subprime mortgages which were extremely profitable since they always carried a higher interest rate. In a time of cheap money that was crucial. They convinced Solomon Brothers to loan them $105 for each $100 in loan originated (this was unusually high since usually a loan business should be able to run on $3 per hundred.) The loans were made, usually without regard to the creditworthiness of the borrower because it didn’t matter. They would collect the fees and resell the loans to Wall Street which would then securitize the loans, sell them in packages offering high interest rates which made them very attractive to investors, and which were then further insured by companies like AIG. Everything went along fine as long as properties continued to increase in value. Borrowers would refinance every couple of years, taking out the equity, and buying more property. Inevitably, as all bubbles must, the balloon burst and when borrowers couldn’t refinance at a higher loan value and balloon mortgage came due, everything came tumbling down and you and I bailed out Wall Street which had so encouraged this kind of risky behavior.
A must read.
It astonished me to see the effect language could have on the market which then cascaded into larger problems. When the president of Countrywide said in 2007 he didn't think we would pull out of the recession until 2009, shudders ran through Wall Street, and when he actually used the word depression, it tumbled head-over-heels. By that time Countrywide had 15% of the market for subprime mortgages and wanted 20%. They were making sooo much money. Then he opened his mouth and the slide began.
Again, there were many causes for the current crisis and some resulted from unintended consequences. For example, in 1986 Reagan and Congress pass the Tax Reform Act that eliminated the tax deduction for personal finance interest on credit cards, car loans, etc. It was a subtle kind of tax increase and was intended to raise revenue and lower the deficits. That's what happened at first until mortgage finance companies realized they could promote second liens on homes by loaning money on the increased equity of homes. All would go well assuming that houses increased in value. Some finance companies even made loans on 125% of a home's value.
The advent of loan brokers was another contributing factor. These were folks who acted as intermediaries between the borrower and the finance company (by this time finance companies had eclipsed banks and savings and loans as mortgage originators, primarily because they could charge more interest since they were not regulated the way banks were.) The problem was that brokers made money by financing and refinancing. It was in their interest to get homeowners to constantly refinance because their only source of income was generated as points on the loan. This made predicting income over the life of a loan very difficult and the securitization of the loans was based in part on expected performance of the loans, which became almost impossible and was wildly optimistic.
Ironically, in another of those unintended consequences, the closing of numerous savings and loans after the S&L crisis threw many experienced mortgage managers and brokers out looking for jobs and places like Country-Wide snapped them up. Of course, they had to start writing mortgages. Another was the California Nolan Act, passed in 1983, that permitted federally chartered S&Ls to invest 40% of their assets in non-residential real estate. Entrepreneurs and developers would purchase an S&L and then use its capital to fund their own building projects. Nolan had been a pal of many S&L executives, and his act opened the door for unscrupulous folks to channel consumer savings into all sorts of projects. S&Ls began to fall like dominoes.
All of the constituent parts of the current crisis were available to review had anyone taken the time to look at the S&L crisis: deregulation of a successful business but one seen as under-performing, interference with regulators by Congress, federal subsidization of loans, reduction of the number of regulators, media cheer-leading (CNBC was then called the Financial News Network, but the role changed little), and finally collapse and massive government bailout: $150 billion in 1980 dollars or the equivalent of about $450 billion today. (Sound familiar?)
I often hear from my conservative friends that if it weren’t for those people getting mortgages they couldn’t afford, we wouldn’t be in this mess. So let’s see. You go to a mortgage lender (bank’s were in the minority in offering mortgages,) because you’ve seen an ad on television. The lender asks how much money you want for your house. You tell him/her. They ask how much you earn. You state what you earn. And you get the loan. So who’s the idiot in this scenario? The person asking or the lender loaning? Lenders would forge appraisals to get higher values for the houses since the higher the mortgage the bigger the fee. And they certainly did not care if the mortgage was repaid since they were sold and securitized immediately.
Here’s how it worked at one company: New Century. Started by four out-of-work executives (they moved a wall so that each would have exactly the same size office since they gave each of themselves the title of President and CEO) they created a business specializing in subprime mortgages which were extremely profitable since they always carried a higher interest rate. In a time of cheap money that was crucial. They convinced Solomon Brothers to loan them $105 for each $100 in loan originated (this was unusually high since usually a loan business should be able to run on $3 per hundred.) The loans were made, usually without regard to the creditworthiness of the borrower because it didn’t matter. They would collect the fees and resell the loans to Wall Street which would then securitize the loans, sell them in packages offering high interest rates which made them very attractive to investors, and which were then further insured by companies like AIG. Everything went along fine as long as properties continued to increase in value. Borrowers would refinance every couple of years, taking out the equity, and buying more property. Inevitably, as all bubbles must, the balloon burst and when borrowers couldn’t refinance at a higher loan value and balloon mortgage came due, everything came tumbling down and you and I bailed out Wall Street which had so encouraged this kind of risky behavior.
A must read.
June 11, 2009
One of those books that make me wish there were 1/2 stars, Chain of Blame tells an important story, yet does it in a very dry and by-the-numbers fashion. Muolo and his co-author, Padilla, are financial reporters close the the mortgage industry and obviously know their stuff, yet the book lacks compelling human drama. The closest it comes is in the description of how many of the long timers in the mortgage industry, like Angelo Mozilo, head of Countrywide, got started.
But the book tends to devolve into a headspinning web of who bought who, who borrowed money from who, tranches, wholesalers, and the ilk, some of which is explained and some of which isn't. The amounts of money are staggering, especially in terms of real money lost. Yes, there were paper losses of value when the stocks tanked, but even more incredible are the stories of banks buying lenders for billions of dollars, only to just shut them down a year later.
I think the real story of the housing & mortgage crisis has yet to be told. I still would like to know why, beyond sheer pigheaded greed, some of these mortgage veterans would agree to such crazy lending practices. I had never heard of "payment option ARMs" before this book, which are adjustable rate mortgages (ARM) where the option of what to pay comes up every month and you can choose to even go negative and move actual money owed to the end of the mortgage! It's all insane, and I'd love an insider's view of why these guys, who should have known that house prices weren't going to keep going up 25% every year, thought they could get away with it. And why the people taking out the loans thought they could as well.
I still say that This American Life's Giant Pool of Money and its follow up show, Another Frightening Show About the Economy are the best reporting done so far on this financial meltdown and many of the characters mentioned in these shows are featured prominently in Chain of Blame.
But the book tends to devolve into a headspinning web of who bought who, who borrowed money from who, tranches, wholesalers, and the ilk, some of which is explained and some of which isn't. The amounts of money are staggering, especially in terms of real money lost. Yes, there were paper losses of value when the stocks tanked, but even more incredible are the stories of banks buying lenders for billions of dollars, only to just shut them down a year later.
I think the real story of the housing & mortgage crisis has yet to be told. I still would like to know why, beyond sheer pigheaded greed, some of these mortgage veterans would agree to such crazy lending practices. I had never heard of "payment option ARMs" before this book, which are adjustable rate mortgages (ARM) where the option of what to pay comes up every month and you can choose to even go negative and move actual money owed to the end of the mortgage! It's all insane, and I'd love an insider's view of why these guys, who should have known that house prices weren't going to keep going up 25% every year, thought they could get away with it. And why the people taking out the loans thought they could as well.
I still say that This American Life's Giant Pool of Money and its follow up show, Another Frightening Show About the Economy are the best reporting done so far on this financial meltdown and many of the characters mentioned in these shows are featured prominently in Chain of Blame.
February 23, 2015
Muolo & Padilla (M&P) contend that Wall Street Caused the Mortgage and Credit Crisis, but readers of their fine book will find reasons to pin the Chain of Blame less upon the intermediation of Wall Street banks than upon the nondepository mortgage lenders & underwriters of Orange County.
Betsy Bayer, a Countrywide Mortgage compliance executive, offers a pithy explanation for her employer's collapse, which she says was due to having
"relaxed its credit guidelines" to stay competitive with companies like Ameriquest, Argent, and New Century, all of which were now out of business or soon would be. She also had something else to say about subprime lending at Countrywide: "It rarely made money for the company" [my emphasis] (p. 256).
—a very interesting claim that I wish M&P had investigated further.
M&P write (p. 292) that Fremont General "cut 8,000 brokers from its approved list of third-party originators"; "Those brokers were responsible for some of the highest delinquency rates in the nation."
I wish M&P had said more about those "third-party originators." Who were they? Where'd they come from, or move on to next? How much did they earn originating soon-to-default mortgage loans?
Niggling points:
David Stockman never worked at Shearson Lehman, though he did work at Salomon Brothers and then at the Blackstone Group, which was started by Stephen Schwarzman, who formerly did work at Shearson. Ralph Cioffi never worked at the Chicago branch office of Bear Stearns.
Feb. 7, 2015.
Feb. 2, 2013.
October 22, 2019
This is probably the best book I have read on the history of the economic meltdown, with the exception of The Big Short. This book is, however, a more in-depth history of how the subprime housing mortgage market was created, whereas the Big Short dealt much more with the immediate events leading up to the crisis with some previous history spliced in.
January 11, 2020
Good first or only book to read on Subprime crisis. Reminds us of the S&L bailout of the 80’s. Describes Wall Streets ability to make tremendous amounts of money with no repercussions or government oversight. Relates how the government is made up of former Wall Street CEO’ s and VP’s who do not hold their former companies accountable forcing the taxpayer pay to bail them out.
July 7, 2009
Do your eyes glaze over when commentators try to describe the financial products that were at the heart of the recent real estate boom? The mortgage boom? This book described the instruments clearly--and gives the reader a great sense of what was fundamentally wrong with the whole process. The title is "Chain of Blame," but there is plenty of blame to go around.
The book is well written and lucid. Nonspecialists can understand it well. I heard talking heads on TV and radio described tranches, REITs, "liar loans," "warehouse line of credit," and so on. The authors describe these terms--and others--clearly and in such a way that the reader can begin to see what had happened--and why the meltdown in the mortgage world should not be seen as so surprising.
It is also the story of clever businessmen and women, who could develop new tools for investment from subprime loans. Subprime loans, simply, are (Page 325): "A loan originated by a lender that is A- to D in quality. Consumers with the best credit ratings. . .are considered 'A' credit quality." In short, loans are being made to purchasers who carry some to a lot of risk. If they can't keep paying their mortgages, the house of cards can fall down. And that is, in short, what happened (although the story is quite a bit more complex than that).
Among the innovators were pioneers such as Roland Arnall (of Ameriquest and Argent) and Bill Dallas (of Ownit Mortgage Solutions). Then, those who adopted practices of the innovators, such as Angelo Mozilo of Countrywide.
The book makes pretty clear that a number of factors contributed to the mortgage problem. Regulators didn't get involved; Wall Street firms ignored the volatile nature of subprime loans in a desire to realize enormous profits; banks bought into the profitable business.
Anyway, if the reader wants a well written, if not overly deep, analysis of the mortgage crisis, this is not a bad place to start.
The book is well written and lucid. Nonspecialists can understand it well. I heard talking heads on TV and radio described tranches, REITs, "liar loans," "warehouse line of credit," and so on. The authors describe these terms--and others--clearly and in such a way that the reader can begin to see what had happened--and why the meltdown in the mortgage world should not be seen as so surprising.
It is also the story of clever businessmen and women, who could develop new tools for investment from subprime loans. Subprime loans, simply, are (Page 325): "A loan originated by a lender that is A- to D in quality. Consumers with the best credit ratings. . .are considered 'A' credit quality." In short, loans are being made to purchasers who carry some to a lot of risk. If they can't keep paying their mortgages, the house of cards can fall down. And that is, in short, what happened (although the story is quite a bit more complex than that).
Among the innovators were pioneers such as Roland Arnall (of Ameriquest and Argent) and Bill Dallas (of Ownit Mortgage Solutions). Then, those who adopted practices of the innovators, such as Angelo Mozilo of Countrywide.
The book makes pretty clear that a number of factors contributed to the mortgage problem. Regulators didn't get involved; Wall Street firms ignored the volatile nature of subprime loans in a desire to realize enormous profits; banks bought into the profitable business.
Anyway, if the reader wants a well written, if not overly deep, analysis of the mortgage crisis, this is not a bad place to start.
April 4, 2011
This book was written before and during the financial crisis, and explores the culture of each distinct industry. The authors did a good job exploring the culture of mortgage originators, the commercial banks, investment banks, and wealthy investors who bought securities they knew nothing about, rated highly by ratings agencies who had no idea what was in them.
The ‘chain of blame’ concept is great for showing how each industry on its own was making sensible, if not responsible, decisions. Separating the risk from the reward, however, was the primary downfall - homeowners thought mortgage originators accepted the risks; mortgage originators thought investment banks accepted the risks; investment banks thought wealthy and overseas investors accepted the risks; wealthy investors thought mortgage originators accepted the risks with the ratings agencies calculating the risks; and ratings agencies thought banks accepted the risks. Everyone wanted the return, but nobody evaluated, understood, and accepted the risk.
The ‘chain of blame’ concept is great for showing how each industry on its own was making sensible, if not responsible, decisions. Separating the risk from the reward, however, was the primary downfall - homeowners thought mortgage originators accepted the risks; mortgage originators thought investment banks accepted the risks; investment banks thought wealthy and overseas investors accepted the risks; wealthy investors thought mortgage originators accepted the risks with the ratings agencies calculating the risks; and ratings agencies thought banks accepted the risks. Everyone wanted the return, but nobody evaluated, understood, and accepted the risk.
March 7, 2011
not nearly my favorite of the latest "business non-fiction adventure" series as I like to call them. but definitely additional insight into all the players on Wall Street and across the US (never realized what a role Southern Cali loan brokers played in the whole scheme of things). Towards the end, i was swearing out loud reading the TARP facts and thinking how crazy that the US nationalized huge banks.
The S&L crisis in 1990 cost taxpayers 150 billion.
The financial meltdown of 2008 is running in the trillions: $750 billion for TARP, $787 billion for Obama's stimulus, $180 billion for AIG, $100 billion minimum to keep Fannie Mae and Freddy Mac solvent, $1.2 Trillion paid by the Fed to buy the mortgage backed securities to keep interest rates low. Wah-pah! Now THAT'S a lot of money, and may drive us into the next (global) depression!
The S&L crisis in 1990 cost taxpayers 150 billion.
The financial meltdown of 2008 is running in the trillions: $750 billion for TARP, $787 billion for Obama's stimulus, $180 billion for AIG, $100 billion minimum to keep Fannie Mae and Freddy Mac solvent, $1.2 Trillion paid by the Fed to buy the mortgage backed securities to keep interest rates low. Wah-pah! Now THAT'S a lot of money, and may drive us into the next (global) depression!
October 4, 2008
A detailed account of the sub-prime lending crisis, tieing it to the S&L deregulation starting in the 1980s and the Wall Street speculation in junk bond investments. Written in late 2007 and published in early 2008, it is an account of the lax lending conditions and rampant speculation that set up the failure of Fannie Mae, Freddie Mac and both investment banks and thrifts later in 2008.
The root causes were the same as for the junk bond crisis in the 1980s: separation of real assets from the speculative financial instruments -- and lack of ANY regulatory restraints. Authors Muolo and Padilla make some minor mistakes but are intimately familiar with the sub-prime lending industry and the investment banks which funded those companies.
The root causes were the same as for the junk bond crisis in the 1980s: separation of real assets from the speculative financial instruments -- and lack of ANY regulatory restraints. Authors Muolo and Padilla make some minor mistakes but are intimately familiar with the sub-prime lending industry and the investment banks which funded those companies.
January 30, 2012
The title is a little misleading in the fact that most of the book is spent examining the non-bank financial institutions (i.e. Countrywide and Ameriquest) that generated the loans that Wall Street investment banks would make into bonds not Wall Street itself. But this is a rich area to study and is not as covered in literature as much as their more glamorous Wall Street partners. This book filled a hole in my understanding or the crisis and it did connect a lot of dots. The book does leave out the first and last chains in the process to a large degree (home buyers/loan brokers, Wall Street/Bond Buyers) which keeps this book from giving you a one stop place to read about the whole crisis. But a worthy addition to the bookshelf for anyone studying the meltdown.
June 24, 2013
"In my opinion, the best description of how the subprime mortgage crisis emerged from Southern California, with a detailed expose of the mortgage brokers, gullible home buyers, greedy investment banks, yield hungry investors, lax regulators and excess liquidity, all worked together to create a massive financial crisis that we still have not recovered from."
September 20, 2009
The authors did a fantastic job with this book: it is very informative and excellently researched--absolutely packed with insights and information!
Would I read this book again? No. I'd listen to the audiobook instead; maybe it would be easier to follow.
Would I read this book again? No. I'd listen to the audiobook instead; maybe it would be easier to follow.
July 31, 2008
My friend Paul Muolo wrote this book, which offers some explanations for the current housing crisis in America, in layman's language. Highly recommended.
October 28, 2008
Great book! And, very time appropriate considering what's going on
January 14, 2009
A must read to understand how the current financial problems happened. I had no idea the problems started so long ago.
Read
February 28, 2011It was ok. I thought the Big Short was much more interesting.
April 25, 2009
Comprehensive look at what went terribly wrong in the mortgage industry. Lots of sniggely little errors, but overall, very well researched.
May 23, 2010
Oh all the names we know....Interesting. How it all went down. Good read.
January 31, 2013
Very clear and understandable explanation of the subject
Displaying 1 - 19 of 19 reviews