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Reign of Terror: How Subprime Lenders and Wall Street Caused the Financial Crisis

Much has been written about the financial crisis. Curiously, though, few authors have taken on the torrent of subprime lending that precipitated the crash. An important new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America -- and Spawned a Global Crisis, by journalist Michael Hudson, does just that.

Hudson, a staff writer with the nonpartisan Center for Public Integrity, has produced a work not only of top-notch reportage culled from his nearly 20 years covering the financial industry, but one that also illuminates our deeply dysfunctional housing market as it exists today. The Monster, in short, explains how we got here.

Focusing on major subprime lenders such as First Alliance Mortgage Co., or FAMCO, and Ameriquest, the book documents the elaborate and systematic schemes such companies cooked up to put people into usurious loans. Such tactics were, quite simply, criminal. They included using Wite-Out and, later, Photoshop to misstate borrowers' income, fake signatures and otherwise falsify loan documents; lying about loan terms; steering customers with stronger credit into more expensive supbrime loans; and deceiving financial regulators and government investigators.

It's important to understand that such conduct, far from being isolated, was in fact endemic among mortgage brokers and subprime lenders, including this nation's biggest banks. Here's a selection of quotes from industry insiders that sums up their business ethos:

  • "Every closing that we had really was a bait and switch. 'Cause you could never get them to the table if you were honest."
  • "We are all here to make as much fucking money as possible. Bottom line. Nothing else matters."
  • "Anything that benefited production -- that benefited me and benefited my wallet -- I'd do it."
  • "It's hard to have a guilty conscience if you don't have a conscience."
  • "I just raped this customer for 5 points and 10 percent interest!"
"The Monster" serves another essential purpose by describing the gradual shift in American attitudes, beginning in the 1960s, toward borrowing in the years leading up the subprime boom. That, too, was encouraged by financial firms eager to overcome people's traditional wariness toward taking out a loan. As Hudson recently told me in an interview:
We didn't used to call borrowing money "credit" -- we called it debt. You owed, you were in the hole and maybe you did it for a specific purpose, like buying a house or starting a business. But it was really something people were careful about. They didn't think of it as a way of life; they thought of it as a necessary evil.
I once saw a quote in an industry trade magazine by a retired lobbyist from the financial industry in which he said, "We really had a lot of problems because the ministers were preaching about the evils of debt. So starting in the '60s, we started this program of outreach to the clergy. Once we got them turned around, we were able to show that credit is actually a way of life -- it's not a bad thing.
Later, there were efforts in the 1980s by banks to change the idea about second mortgages. For generations, taking out a second mortgage was considered vaguely disreputable. But then you started seeing these bank advertisements -- we found $50,000 hidden in our house thanks to Chase Manhattan Bank! -- and this effort by mainstream banks to push people to think of their homes not just as shelter, but as an investment and resource for money.
That change in the concept of debt, coupled with three decades of financial deregulation, cleared the way for the ensuing tide of predatory lending. Then entrepreneurs like Roland Arnall, founder of Ameriquest, came along and created sales organizations founded on a single principle: growth. Not merely aggressive expansion, mind you, but the kind of steroidal growth that in banking is possible only through fraud.

Indeed, the book take its title from a key step, known as the "Monster," in the sales pitch loan officers at FAMCO were trained to follow to separate customers from their money. The entire presentation amounts to a series of half-truths, bait-and-switches and outright deceptions. It's a con dressed up as normal business. As Hudson told me:

With rare exceptions, no one ever writes a memo that says, "Here's the fraud we intend to commit, and here's how we're going to do it." It's always an informal system of rewards and punishment that encourages, condones, and rewards fraud and bad behavior.

Basically, the idea is that you hire young people, you incentivize them with lots of money, you apply incredible pressure to make incredible numbers. What you end up with is a culture and place where people do whatever it takes -- cut corners, lie, cheat and steal -- to make things happen.

The Monster also details Wall Street's role in this racket, explaining how investment banks such as Lehman Brothers boosted demand for shoddy loans by creating mortgage-backed securities that were as bogus as their underlying loans.

If recent events have exhausted your sense of outrage, contrast the fate of former Lehman CEO Richard Fuld with that of the homeowners Hudson chronicles who lost their shirts, and often their homes, to subprime lenders. Fuld, who led Lehman to become the Street's top buyer of subprime loans, earned an estimated $500 million between 2000 and 2007, and as of this summer remained in the investment business. To this day, incredibly, Lehman continues to hand out millions of dollars in bonuses even as its bankruptcy case proceeds in court.

As for Arnall, who died in 2008, he eventually became U.S. ambassador to The Netherlands and ended life as a billionaire. Facing multiple investigations by state authorities, Ameriquest effectively shut down in 2006, just before the housing market buckled.

Appalling, of course, and justice is in short supply in The Monster. But the book is essential reading for anyone wanting to understand the origins of the financial crisis and, since history is a guide, to stay alert for the next one.

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