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Chain of Blame Book Review

November 24th, 2008

If you looking for a book to read this Thanksgiving weekend to help you make sense of this whole mess we are in, I recommend Chain of Blame by Paul Muollo and Matthew Padilla. Muollo, an editor at the trade publication National Mortgage News, and Padilla, a reporter for the Orange County Register, were in the thick of things during the housing bubble and subsequent mortgage meltdown. They do a very good job of sketching the history of the subprime market including its roots in lenders such as Beneficial and Household that actually held on to the loans they underwrote and had repo men knocking on doors to remind folks to pay.

Thanks to brokerage firms such as Friedman Billings Ramsey and later all the big Wall Street houses, the subprime business mushroomed into a multi-trillion dollar orgy of sketchy loans, securitizations and all manner of financial exotica that we now see collapsing all around us. At times the book gets a little scattered as the authors jump from one mortgage industry player to another. But there are some memorable vignettes, including New Century Financial co-founder Steven Holder hosting "signing parties" where he personally approved loans that the firm's own credit analysts thought were too dicey.

There's a lot of detail on the always colorful Countrywide co-founder Angelo Mozilo including the advice of his now-deceased co-founder, David Loeb, who said that independent mortgage brokers--who only cared about closing a deal and not the long term viability of the loan--were "crooks." As negative news about Countrywide started piling up, Mozilo blocked off employee access to a Web site called the Mortgage Lender Implode-O-Meter. He also considered firing Coutnrywide's entire public relations department. In Countrywide's final days Mozilo went off on a rant, saying the government was deliberately persecuting Italian-American businessmen, citing former New York Stock Exchange head Richard Grasso, Qwest's ex ceo Joe Nacchio, investment banker Frank Quattrone and Home Depot's ex chief Robert Nardelli as evidence.

Mozilo was short on blame for himself. Asked about all the independent mortgage firms that piled into the subprime business he told co-author Muollo: "I didn't realize that they didn't know what they were doing. It got out of control. They were like 'We need more. We need more subprime loans to buy.'"

This book doesn't tell us how to fix the crisis and it isn't a pretty picture. It does provide a colorful reminder of man's vanity, greed and capacity to pass the buck.

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