FDL Book Salon Welcomes Michael Hudson, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis

Welcome Michael Hudson, PublicIntegrity.org, and Host, Dean Baker, CEPR.net.

[As a courtesy to our guests, please keep comments to the book. Please take other conversations to a previous thread. – bev]

The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis

Dean Baker, Host:

Monster Madness In Alan Greenspan’s America

In The Monster, Michael Hudson gives us a detailed account of the how Roland Arnall created Ameriquest and made it into the giant of subprime lending. In the process the book implicates the major Wall Street firms, most importantly Lehman, who eagerly packaged junk loans into mortgage backed securities and more complicated instruments. He also notes the corruption of the three major credit rating agencies, who received big fees for giving these assets investment grade stamps. The list of aiders and abettors includes Massachusetts Governor Deval Patrick, California Governors Grey Davis and Arnold Schwarzenegger, and even the community group ACORN.

The few committed regulators who sought to rein in Ameriquest’s predatory practices were hopelessly outgunned. They lacked the resources to compete with Ameriquest’s high-priced lawyers and faced political obstruction at every step in their path.

This is an extraordinary depressing book to read, even the basic outline is already widely known. The big question that readers must have is whether there is any reason to believe that anything has changed in the wake of the crash?

Certainly the main villains in this story never had to face justice. Roland Arnall died from cancer in 2008 with his huge estate largely intact. The other leading villain, Richard Fuld, the CEO of Lehman, remains an incredibly wealthy man, even if he no longer runs a giant investment bank. Other actors who profited enormously from the financial shenanigans of the housing bubble, like Robert Rubin of Citigroup and Angelo Mozillo of Countrywide, also have kept their fortunes. In fact, Rubin continues to be viewed as one of the leading statesman of the Democratic Party.  [cont’d]

With all the leading culprits still able to enjoy the benefits of their actions, what possible lesson could people in the financial industry take away from this episode?

In a similar vein, the two Federal Reserve Board chairmen who oversaw this disaster, Alan Greenspan and Ben Bernanke, continue to be respected public figures with Bernanke having been reappointed as Fed chair by President Obama. (It is important to remember that Bernanke was in the middle of this mess from the summer of 2002 when he was appointed as one of the seven governors of the Federal Reserve Board.)

While the specifics of Ameriquest’s operations and those of other subprime lenders may have only come to light after the fact, the basic story was easy to see at the time. There were millions of loans being made to people who did not understand the terms of the mortgage, did not have full documentation of their income/assets, and were borrowing the full value of their home and sometimes more. (A survey by the National Association of Realtors showed that almost half of first-time buyers in 2005 put zero money down.)

There was a sharp and unexplained surge in home prices from a 100-year long trend. This was not matched by an remotely corresponding increase in rents. I was having friends/relatives of mortgage brokers contact me telling me that their friend/relative was being told to fill in numbers on mortgage applications so that they would go through.

In other words, it was easy to recognize that something was very seriously wrong in the housing market from 2002-2006 and that it was likely to have very bad consequences for the economy. Greenspan and Bernanke did nothing, and now we have 25 million people unemployed or under-employed.

Wouldn’t it be appropriate to make these two people pay a price since they, more than anyone, bore responsibility for preventing this sort of disaster? In Bernanke’s case, is there any reason that the public should not demand his removal from office? In Greenspan’s case, perhaps he can be denied his pension. After all, it is hard to imagine more extreme and harmful incompetence that what Greenspan did under his watch. Obviously he can’t be fired, but why should the taxpayers foot the bill for his pension? He will obviously be a rich man regardless, but is there any reason not to try to impose at least some sanction?