Liar Loans: White-Out & Scotch Tape at the Subprime Art Department

Doug Henwood has a good eye for the best of recent business analysis. Henwood’s interview with Michael W. Hudson (about Hudson’s new book, “The Monster”) is a must-hear for those interested in the subprime mess. From the book website:

This book tells the story of . . . subprime by chronicling the rise and fall of two corporate empires: Ameriquest and Lehman Brothers. . . . By the height of the nation’s mortgage boom, Orange County was home to four of the nation’s six biggest subprime lenders. Together, these four lenders—Ameriquest, Option One, Fremont Investment & Loan, and New Century—accounted for nearly a third of the subprime market. . . .

Under its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of the nation’s shadiest subprime lenders, including Ameriquest. “Lehman never saw a subprime lender they didn’t like,” one consumer lawyer who fought the industry’s abuses said. Lehman and other Wall Street powers provided the financial backing and sheen of respectability that transformed subprime from a tiny corner of the mortgage market into an economic behemoth capable of triggering the worst economic crisis since the Great Depression. . . .

[Helped by Lehman,] Ameriquest Mortgage unleashed an army of salespeople on America. They numbered in the thousands. They were young, hungry, and relentless in their drive to sell loans and earn big commissions. One Ameriquest manager summed things up in an e-mail to his sales force: “We are all here to make as much f****** money as possible. Bottom line. Nothing else matters.” [This activity] helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits [for Ameriquest’s CEO].


Two highlights of the interview stuck with me. Hudson describes how subprime boiler rooms equipped salespeople with white-out, exacto knives, and scotch tape—the better to cut out embarrassingly low income figures from applicants’ W-2s and to paste in higher figures from other W-2s that happened to be lying around. Salespeople called the room where this occurred the “art department” or “lab.”

We also learn from Hudson that at one point, Ameriquest’s CEO was worth over $3 billion, and apparently lived in “a $30 million estate.” That little data point reminded me of Matthew Yglesias’s recent reflections on some of the extraordinary wealth in our society:

[We have to wonder how many billionaires are] reckless gamblers who got lucky making bad bets [rather] than brilliant visionaries who can peer into the future and see the best ideas. In other words, if a thousand guys walk into a casino and all put $1 million down on different numbers on the roulette wheel, then the guys who win all make a second bet, someone will probably walk out of the casino with a billion dollars and an air of smug self-satisfaction.

Even as that conclusion seems ever more fitting for the finance sector (where Paul Volcker claimed the last great innovation was the ATM), an army of lobbyists amasses on Capitol Hill to les bons temps roulez. We can probably rest assured that current regulators will not openly fight states’ efforts to curb abusive lending (as many federal agencies did during the Bush era). But how many could end up in rather comfortable positions at the very firms they are now regulating?

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