WaMu and We Don’t Lose Deals to Income!
Those are the words that were printed on a large banner that hung above the cubicles at Ameriquest Mortgage in Sacramento, California, according to an ex-employee of the now defunct sub-prime mortgage banking lender that was shut down by Citigroup in 2007.Â Long Beach Mortgage, ACCâ€™s wholesale lender, would later be bought by Washington Mutual.
Ameriquest, an originator of sub-prime mortgages owned by ACC Capital Holdings, was responsible for $50 billion in sub-prime loans in 2004 alone, roughly ten percent of the sub-prime loans made that year.
Back then, sub-prime loans could be sold at a premium, meaning that if you sold a $500,000 loan to Wall Street, you could expect to get $520,000, the extra $20,000 referred to as â€śservice release premiumâ€ť.Â And thatâ€™s on top of the points and fees that Ameriquest charged the borrower to get the loan, in this example letâ€™s say three points or $15,000.Â Thatâ€™s $35,000 to put together the paperwork needed to process a loan and then dump it onâ€¦ letâ€™s say, Lehman Bros. or Citibankâ€¦ or JPMorganâ€¦ or whomever.
Can you do that math?Â They made $35,000 on a $500,000 loanâ€¦ so on $50 billion in loans, they would have made $3.5 BILLION.Â And that, as they say, is darn good money.
Itâ€™s no wonder that Ameriquest boasted that they were the sort that didnâ€™t let a tiny, little, insignificant thing like a borrowerâ€™s INCOME get in the way of originating a loan.
Next letâ€™s take a look at Washington Mutual, the bank whose television and radio ads used to talk about how they loved puppies and kittens.Â The Senate Permanent Subcommittee on Investigations under Chairman Carl Levin, D-MI, and Ranking Member Tom Coburn, R-OK, launched a series of four hearings in April to examine some of the causes and consequences of the financial crisis, and on Friday theyâ€™ll issue their first report and from reading the early releases, itâ€™s going to be like my birthday a million times over.
The first bank under the Committeeâ€™s microscope, Washington Mutual, was at one time the nationâ€™s largest thrift with more than $300 billion in assets, $188 billion in deposits, and 43,000 employees.Â Washington Mutual (WaMu to its friends and co-conspirators) was the largest bank failure in U.S. history, when it was handed off in the middle of the nightâ€¦ I mean, when it was sold to JPMorgan/Chase in 2008.
Not so coincidentally, I received a call today from an ex-employee of WaMu, a woman who worked in various capacities including loan underwriter in the Downey, California office.Â (That will be important later.)
I spoke with her for maybe fifteen minutes earlier this morning, and that was all I needed to arrange to interview her at length at a more convenient time.Â During our fifteen-minute call, some of the things she said actually brought tears to my eyes.Â And then I found myself getting angryâ€¦ really angry.
Iâ€™ll be publishing my interview with her tomorrow evening, so look for it on Friday, but to give you some idea of what to expect, just think Enron meets Bernie Madoff meets Adelphia meets Drexel Burnham Lambert meets Charles Keating meets everything-else-thatâ€™s-wrong-with-corrupt-capitalism meets a serial child rapistâ€¦ and youâ€™ll be halfway there.Â What WaMu did was beyond unforgivable, and most assuredly only the tip of Wall Streetâ€™s iceberg.Â There simply is no punishment that could fit this crime.
During my interview with this courageous banker, whoâ€™s name I will not mention, I heard stories of a bank where they routinely manufactured borrower tax returns, paycheck stubs from jobs that borrowers never had, and in general lied or overlooked anything that might hinder a loanâ€™s approval.Â And they did this as a matter of day-to-day business, more often than not, without the borrowerâ€™s knowledge.Â Their primary target: poor, relatively uneducated minorities whose dreams they could appear to fulfill.
Just like at Ameriquest Mortgage above, be assured that at WaMu they were the sort that most certainly didnâ€™t lose deals to income either.
The Senateâ€™s Subcommittee began its investigation into the financial crisis in November 2008.Â Senate investigators gathered millions of pages of documents, conducted 100 interviews, held depositions, and brought in dozens of experts.Â And this is far from being the ending, itâ€™s just the beginning.
The Committee says that its hearings in the near future will look at the role of the regulators (Dopey and Sleepy?), the AAA-happy credit rating agencies, the inconceivably greedy and much too big to fail investment banks, and the use of complex financial instruments referred to as derivatives that ensured that no one would be able to understand what they were doing.
This is the story of the smartest guys in the room.Â People so brilliant that they could never be replaced.Â In fact, some on Wall Street had jobs so secret and complex that they couldnâ€™t even do them.
According to Senator Levin, my new personal hero, WaMu employed â€śa toxic mix of high risk lending, lax controls, and destructive compensation policies.â€ťÂ In the Senate Committeeâ€™s press release of April 12, 2010, he went on to make the following statements:
â€śAs the debate on financial reform begins, it is critical to acknowledge that the financial crisis was not a natural disaster, it was a man-made economic assault.â€ť
â€śWashington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river.â€ť
â€śExamining how Washington Mutual operated, and what its insiders were saying to each other, begins to open a window into the troubling mortgage lending and securitization practices that took our economy over a cliff.â€ť
â€śThe Washington Mutual case study examines how the bankâ€™s search for profits led to the origination and securitization of shoddy mortgages that infected the entire financial system.Â The documents show that, in the mid-2000s, the bank made a conscious decision to focus on high-risk mortgages, because higher risk loans offered greater profits.Â Washington Mutual increased its securitization of sub-prime loans six-fold, primarily through its sub-prime lender, Long Beach Mortgage Corporation.â€ť
Long Beach Mortgage?Â Now where have I heard that name before?Â Oh yeah, Long Beach Mortgage used to be a part of Ameriquest Mortgage.Â The plot thickens.
Again from the Senate Committeeâ€™s release of April 12:
â€śFrom 2003 to 2008, documents were unearthed showing that these high-risk loans were problem-plagued.Â Internal reports show that Long Beach and Washington Mutual loans did not comply with the bankâ€™s own credit requirements, contained fraudulent or erroneous borrower information, and suffered from large numbers of early payment defaults on the part of borrowers.â€ť
â€śOne FDIC review of 4,000 Long Beach loans in 2003, found that less than a quarter could be properly sold to investors.Â A 2005 review of loans from two of Washington Mutualâ€™s top producing retail loan officers found fraud in 58% of the loans coming from one loan officerâ€™ s operations and 83% from the other.â€ť
â€śYet those two loan officers continued working for the bank for three years, receiving prizes for their loan production.Â A 2008 review found that staff in another top loan producerâ€™s office had been literally manufacturing borrower information to speed up production.Â â€ś
Levin and the Committee also found a systematic approach at work inside Washington Mutual.Â They determined that the bankâ€™s pay policies and financial incentives contributed significantly to the problems.Â The Committeeâ€™s release stated:
â€śLoan officers and processors were paid based on volume, not the quality of their loans, and were paid more for issuing higher risk loans.Â Loan officers and mortgage brokers were also paid more when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate â€“ a practice that enriched WaMu in the short-term, but made defaults more likely down the road.Â These skewed compensation practices went right to the top.Â In 2008, when he was asked to leave the failing bank, CEO Kerry Killinger was paid $25 million.â€ť
Now, if you remember reading any number of my articles on the bankers and how they broke the bond market by packaging and selling mortgage backed securities, then this next paragraph should inspire a few goose bumps.Â It sure did for meâ€¦
â€śThe Subcommittee investigation found that the bank contributed to the financial crisis by making hundreds of billions of dollars in shoddy, high risk mortgage loans, packaging them, and selling them to investors as mortgage backed securities.â€ť
â€śDocuments obtained by the Subcommittee also show that, at a critical time, Washington Mutual selected loans for its securities because they were likely to default, and failed to disclose that fact to investors.Â It also included loans that had been identified as containing fraudulent borrower information, again without alerting investors when the fraud was discovered.Â An internal 2008 report found that lax controls had allowed loans that had been identified as fraudulent to be sold to investors.â€ť
So, there you have it.Â What they did was no accident.Â They did it on purpose.Â They wanted to get rid of the garbage they had created so they stuffed it into bonds, stood by while they watched those bonds get rated AAA, and then they sliced them up and sold them to investors all over the world. Â And that’s fraud.
When those investors, many who were pension funds that manage money belonging to teachers, truck drivers and fire fighters, realized that the bonds were not properly ratedâ€¦ that they were not in fact AAA rated bondsâ€¦ they dumped them faster than you could say â€śsecuritization trustâ€ť.Â On that day, in the summer of 2006, July, if memory servesâ€¦ the music died.
On that day, it became impossible to get a new mortgage or refinance an existing one whether one had equity or not, because with investors no longer willing to trust the ratings agencies, the banks saw that they would no longer be able to sell their loans to investorsâ€¦ and they started hoarding what cash they had almost overnight.Â Without mortgages available, housing prices went into the freefall that continues today.Â Â But many just couldnâ€™t see it yet.Â The foreclosure crisis had begun in earnest.
The first to go under and lose their homes were the families closest to the edgeâ€¦ but hundreds of thousands more would soon find their families circling the proverbial drain, about to lose their home.Â As these highest risk loans went into default and the banks started foreclosing, and as prices continued to drop due to the tightening credit markets, all factors combined to fuel further foreclosuresâ€¦ and then more still.
The government, most notably then Treasury Secretary Henry Paulson, and Federal Reserve Chairman Ben Bernanke looked at the problem and immediately consulted with the titans of Wall Street like Dick Fuld at Lehman Bros., Jamie Dimon at JPMorgan, that guy at Citi with the evil Bond villain sounding name, Vikram Pandit, and Lord Blankcheck at Goldman Sachs, to leave out quite a few.
Paulson and Bernanke were assured that all was containable, that each had plenty of liquidity, that it was just sub-prime loans that had gone into defaultâ€¦ and a terrible misconception was born.
They labeled it a â€śsub-prime borrower crisis,â€ť not something that could ever spread beyond a small number of mortgages relative to the whole of the mortgage market.Â But they were wrong. It was never a sub-prime borrower crisis.Â The system of securitization was failing because of greedy bankers who had intentionally and fraudulently packaged mortgage backed securities and allowed them to be improperly rated AAA.
And the problem was systemic, because all of the banks had been buying and selling each others bonds, believing that by purchasing a type of insurance policy that protected the holder of such a bond from its default, known as a credit default swap, they had removed the risk.Â And believing risk to have been removed they had started taken chances that no prudent person or company would ever take.Â In fact, the entire financial system was soon at the brink of complete collapse because, like African slaves aboard the slave ship Amistad, if one firm went down, the others were chained to it.
Paulson may not have seen it immediately, but when Bear Stearns went under, and he saw clearly the real nature of the problem, wellâ€¦ thatâ€™s when politics entered the picture, and the timing couldnâ€™t have been worse.
President Bush was finishing his second term, and the Democrats, who now controlled Congress, hated him with the white hot intensity of a thousand suns, or something very close.Â Paulson was told not to come to Congress for any reason, unless he could guarantee that a crisis was at the door.Â The Democratic controlled Congress would do nothing that might make Bush look good.Â The next President would deal with the problems, and the next president would be a Democrat.
And thatâ€™s why we all watched in shock as Paulson and Bernanke, two very smart and experienced individuals who had been watching the crisis unfold every day for months and months before, jumped in their car and drove to Capitol Hill to tell our elected representatives that the sky was literally about to fall.Â They needed a check for $700 billionâ€¦ and just make it out to Hank.
I couldnâ€™t understand why at the time, the two had waited until the last minute like thatâ€¦ I commented to a friend of mine how irresponsible it was for them to have not come to Congress sooner under such circumstances.
Months later, I read a 60-70 page white paper written by Phillip Swagel, the Chief Economist at Treasury from December 2006 until the day President Obama was sworn in as our 44th President, if my memory serves.Â He wrote a paper for the Brookingâ€™s Institute, and as I turned the pages, chills went up and down my arms and legs as I came to understand why it was that when economics and politics collide, no good can come.
(By the way, at the end of last year, I wrote a white paper using those words I remembered thinking on that day: The Foreclosure Crisis â€“ Where Economic Policy and Politics Collide, No Good Can Come.Â I published a version of that paper on Mandelman Matters using an illustration of Santa having come down the chimney into an empty and obviously foreclosed home, under the title: Ho, Ho, Homeless, if you have trouble finding it and want to, just send me an email and Iâ€™ll send you a link.)
Is it starting to come together?Â Starting to crystallize.Â If so, great.Â If not, donâ€™t worry.Â As I said this is the beginning, not the end.Â And Iâ€™ll be writing a lot more on this subject and a lot sooner that you think.Â Iâ€™ve waited for this day for a long timeâ€¦ two yearsâ€¦ but itâ€™s finally here.
To the homeowners, the thousands of homeowners that I have communicated with over the last couple of yearsâ€¦ the homeowners that I have assured are not the cause of our countryâ€™s economic collapseâ€¦ to the homeowners who have lost homes believing that it was somehow their own fault that everything turned out so terribly, terribly wrongâ€¦ to all of you I want to scream from the highest mountain top:
Free at last, free at lastâ€¦ it is time for you to break the bonds of shame that have kept you quiet all these many months, afraid to talk to others, afraid that it is you that failed.Â Itâ€™s time to come out into the light and say that you now understand that it was not your fault.Â It was the banks that broke our world and caused our pain.Â It was the banks that committed the crimes here.Â You?Â You just bought a house under the assumption that the world tomorrow would look at least something like it did yesterday and for the last 70-odd years.
To CNBCâ€™s Diana Olick and Rick Santelliâ€¦ and all the others like you who have blamed the homeowners and exacerbated their feelings of shame with your ignorant and mean-spirited rantings and ravings about how youâ€™d rather die than see your neighbor helped financially by the governmentâ€¦ it will soon be clear that it has always been you that should be deeply ashamedâ€¦ you who should beg forgiveness from the American people, because it is you who have caused harm to so many for no reason but your own ratings.
As I told so many of you, on the phone, by email, and through my articles, your day would soon come, and it is almost here.Â Let the healing begin.Â Then itâ€™s time to make our voices heardâ€¦ loud and clear.Â The mid-terms are still far enough awayâ€¦ there is still time.