Page 3 of 3 BOOK REVIEW Subprime - an (im)morality tale Confessions of a Subprime Lender by Richard Bitner
Reviewed by Julian Delasantellis
and produce for the files a counterfeit US Internal Revenue Service "W-2" form
that documented phony income from employment. This could not have been all that
uncommon, for a friend tells me he actually got his mortgage a few years back
through the employment of this specific criminal artifice.
If you knew where the system had its seams you could put a pauper in a
McMansion, and nobody knew and worked the seams
better than the mortgage brokers.
Integral to the moral collapse at the base level of these exchanges was the
role played by real estate appraisers. Mortgages were not supposed to be made
for more than the property was worth, so that the lender might eventually get
his money back should the borrower default, and subsequently the property go
through a foreclosure sale. However, it was no fun being a stickler to this
rule, for the interest and fee income was determined as a percentage of the
total loan package. The more the mortgage, the merrier the mortgage broker.
Thus, the mortgage brokers offered the appraisal industry its cash for their
virtue; the appraisers demurred, saying cash was not necessary - checks would
be just fine.
Bitner described the appraiser's moral dynamic like this:
Appraisers
rely on the lenders and brokers who hire them to make a living. Being true to
their profession and pleasing the customer is a difficult balancing act. When a
broker orders an appraisal, he provides an estimate or target value for the
property to the appraiser. If the appraiser has problems consistently reaching
this number, the broker will hire someone else. Any appraiser who goes strictly
by the book can struggle to get repeat business.
Of course,
once the artificial, inflated values got codified into actual appraisals, it
only stoked the real estate fire even hotter, for once people saw just how
values were (artificially) skyrocketing, they jumped into the market, thus
spurring even more demand.
Once the mortgages arrived on Wall Street, to be bundled up and then sliced and
diced into mortgage backed securities, a new opportunity for another moral
collapse presented itself-by the ratings agencies.
The commercial and investment banks who sold the MBS to investors wanted most
of them off their hands and books as quickly as possible. The great profit to
be made here was in the fee income gained in churning them, not in holding them
to maturity. To do that they had to persuade potential investors that, indeed,
the securities were as safe as the banks were promising they were. This job was
traditionally done by Wall Street's three major ratings companies, Standar
& Poor's, Moody's IInvestors Service and Fitch Ratings. Investors trusted
their judgment and integrity; this was a mistake. The ratings agencies were
paid by the banks, not by the investors, so it was to the piper's tune of their
paymasters that they danced.
Bitner described this moral dynamic this way:
The entire rating process
appears to be fundamentally flawed. By now, the inherent contradictions in the
system should be clear on several levels. First, since the investment banks
compensate the [rating] agencies, the relationship, … is "hopelessly
conflicted". Second, as active participants in the deals they structure, the
agencies are not objective. Third, having no liability coupled with exorbitant
revenues is a toxic combination. There's another aspect to the relationship
that merits discussion. If an investment bank issuing a security believes 80
percent of it should be rated AAA and the agency can validate only 75 percent,
the issuer can threaten to move the business to another agency, but it doesn't
usually come to that. Since the agencies understand the threat is real, they
provide an advisory function to help their clients achieve the desired number.
Bitner dedicates a few pages to assigning some blame to former Federal Reserve
chairman Alan Greenspan (who this month, in testimony to the US House Oversight
Committee, admitted "a flaw in the model that I perceived is the critical
functioning structure that defines how the world works" - Fed-speak for being
just completely wild ass wrong) for both keeping rates so low from 2002-2004,
and for his near monomaniacal advocacy of Adjustable Rate Mortgages (ARMs). He
also assigns blame to the realtor and homebuilding industries for looking the
other way as this was all happening.
Almost like a pandemic viral contagion, US real estate in the last decade
seemed to attack the morals of anybody who came into contact with it; nobody
seems to have had, or offered up, much resistance.
Bitner concludes his book with some suggestions as to how the system can be
reformed so as this will never happen again. Most of them involve the creation
or strengthening of an institutional regulatory framework, so those in the
business will know they will face some sanction in this life should they forget
the penalty they will be forced to pay for their immorality in the next.
Who was to blame? According to Bitner, who wasn't?
"I can point fingers at a lot of different groups, but at the end of the day we
ourselves still pulled the trigger on every deal. We decided whether a borrower
was a good credit risk, and we funded the loan using our own money. No one else
made that final decision. With such power comes responsibility, and like it or
not, I can't sit here without putting some of the blame back onto myself."
Bitner is admirable in that he is willing to take a measure of blame onto
himself, when so many others are flailing about furiously trying to do the
opposite, but I still think he judges himself somewhat harshly. As for his
industry, that's another story. To resurrect a cliche popular in the 1960s and
1970s but out of favor in the conservative, "morals" counterrevolution that
followed it, I think it was mostly society's fault.
On October 3, the Los Angeles Times published an interview with Stanley Weiser,
co-screenwriter (with Stone) of Oliver Stone's 1987 high finance morality tale, Wall
Street.
Weiser said that one thing that has surprised him the most about how his film
has been interpreted these past 21 years is how many people think that Gordon
Gecko, the amoral, ruthless corporate raider played by Michael Douglas (who won
an Academy Award for the role) was the hero of the story. Many times, Weiser
relates, people have come up to him to give their thanks, telling him that it
is Gordon Gecko's example they try to follow in their professional lives.
"The movie changed my life," one told Weiser. "Once I saw it I knew that I
wanted to get into such and such business. I wanted to be like Gordon Gekko."
Such is the true state of American morality, the Petri dish from which the
entire financial crisis grew and thrived. No matter what the Sunday-morning
preachers and tub thumpers may call out to the assembled multitudes in the
mega-churches, the real, contemporaneous American immorality is in leading a
standard, boring middle-class lifestyle, and the real virtue is being able to
jet from your ski lodge in Vail to your private island in the Seychelles.
It is possible to run a society in this fashion, but, just as old Western
frontier towns knew they needed a lot more sheriffs and jails than they did
monasteries, you can't "deregulate" societies with values such as this and just
hope and pray that the morality of the market will make things all right.
Talk in the entertainment trades is that the financial crisis is leading Fox
studio executives to consider a Wall Street remake. Maybe this time,
with the leverage bubble so burst, people will get it.
Confessions of a Subprime Lender, by Richard Bitner. Wiley, June 30,
2008 (paperback illustrated edition edition). ISBN: 0470402199. Price:
US$19.95, 208 pages.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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