Culture

Insiders and Outsiders

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ON A RAINY NOVEMBER morning in 1990, an eighty-nine-year-old widower from Burbank, California named Anthony Elliott, after discovering that he had lost his life savings, climbed into his bathtub and slit his wrists with a straight razor. Three days earlier, on Thanksgiving Day, he had typed a suicide note. It read: “There is nothing left for me ... My government is supposed to serve and protect, but who? Those who can gather the most savings from retired people.”

Elliott had been a victim of “predatory lending,” and the financial institution that coaxed him out of his $200,000 nest egg was Lincoln Savings and Loan, run by the now-infamous Charles Keating. Federal regulators had been watching Lincoln, but Keating recruited Alan Greenspan, former chairman of President Ford’s Council of Economic Advisors and soon to be Chairman of the Federal Reserve, to get them off his back. Greenspan told the regulators that Lincoln was “financially strong” and presented “no foreseeable risk” to investors. It collapsed soon afterward.

Elliott’s suicide is but a footnote in Michael W. Hudson’s new book, but it resonates nonetheless. If predatory lending played a role in the S&L debacle, how could we have allowed it to thrive again? Once the deregulation of financial institutions began, so did the skullduggery of those who ran them.

Deregulation started all the way back in 1979. The Carter Administration removed rules governing what S&L’s could invest in, and almost immediately CEOs such as Roland Arnall, who launched Long Beach Savings and Loan and later Ameriquest, began concocting schemes to exploit the looser regulations. Those schemes would create great wealth for Arnall and his ilk while placing investors in increasing perilan imbalance that became more extreme as deregulation progressed over the next three decades.

Along with deregulation came something more insidious: a campaign by the big banks to push homeowners into second mortgages and home-equity loans. Hudson reminds us that before the 1980s, “the idea of borrowing against the family homestead … was considered vaguely disreputable, an act of desperation or irresponsibility.” But that changed after Citicorp and the large S&L’s bombarded homeowners with advertisements telling them to liquidate their equity. In a bit of wordplay that would make Frank Luntz proud, the ads invariably replaced the stigma-holding term “second mortgage” with the friendlier “equity access.” While this campaign was initially aimed at the economically stable, it did not take long before an alternate industry emerged to target the poor and financially unsophisticated.

Retirees such as Elliott, lenders quickly learned, were among the most easily manipulated. “Remember,” executives from one firm wrote in an internal memo, “the weak, meek and ignorant are always good targets.” Hudson offers multiple examples of this type of targeting, first by the shadier S&Ls in the 1990s and then, most prolifically, by modern subprime lenders. Hudson’s delineation of a systematic effort to deceive these borrowers rebuts arguments that the borrowers themselves bear most of the responsibility for the subprime crisis. On the contrary, the dishonesty of many lenders was mind-bogglingly ubiquitous, and went beyond lying about mortgage rates and prepayment penalties to forging signatures and doctoring loan applications.

Hudson focuses on Arnall, among all other potential targets, because Arnall spent virtually his entire career as a predatory lender. Ameriquest, his flagship company, became the largest and perhaps the most devious of the subprime mortgage lenders. He was also among the first to partner with Wall Street to securitize subprime loans. This turned out to be a watershed moment, because it was not until investment banks began bankrolling mortgage lenders that the stage was set for a major crisis. And here Hudson turns to Lehman Brothersthe investment bank that gambled biggest on subprimeto explain how our housing mess sparked a global meltdown.

The Monster is among a wave of books and films that attempt to shed light on the subprime crisis and the 2008 crash, but it is remarkably comprehensive on its owna sweeping, detailed, and forceful account of the events, the people, and the policies that led to our current economic woes. Hudson’s wisest decision was to avoid obsessing over infamous and arcane Wall Street creations, such as derivatives, collateralized debt obligations, and credit-default swaps, even though they played a role in the market crash. Instead he chose to focus on peoplethe perpetrators and the victims of mortgage fraud, and the brave few who tried to stop it.

In the end, though, Hudson’s book is about something broader than mortgage lending; its true subject is the insular world of corporate sales, and the dire consequences that ensue when sales departments are usurped by a culture of absolute greed. (The title refers to a deceptive sales tactic wielded by First Alliance Mortgage Company.) Hudson portrays Ameriquest and First Alliance as paradigms of this culture: where cut-throat competition and complete disregard for a client’s best interests were the rule, where movies such as Boiler Room were worshiped, and where managers pressed for more loan volume, regardless of how it was achieved. Absent deregulation and the culture that gave rise to it, Hudson asserts, the crisis would not have occurred.

So why was it allowed to thrive again after wreaking such havoc only a few years earlier? The truth was that this culture was viewed not as a danger but as a virtue by those in positions of real power. Deregulation had been gospel for twenty-five years at the executive level, and Greenspan refused to step in during the crisis. While Greenspan gave lip service to concerns about “questionable practices,” his true philosophy was summed up in 1963 in an essay for Ayn Rand’s journal: “It is precisely the ‘greed’ of the businessman which is the excelled protector of the consumer.”  

Hudson’s book is an utter repudiation of that philosophy. “All we care about is fucking making money,” one Ameriquest manager wrote in an email, “Nothing else matters.” Here, embodied by Arnall and his company, is Greenspan’s “‘greed’ of the businessman” in its purest form. While conservatives continue to insist that it was government action, not government inaction, that caused the crisis, the culprits they point toFannie Mae and Freddie Mac, the Community Reinvestment Actwere minor players in the orchestra that ushered in the collapse.

No, here was an unfettered market that failed to “self-correct,” and Greenspan, in what were perhaps his final hours upon the world stage, admitted as much. In a chilling exchange with Rep. Henry Waxman before a House Committee, Greenspan lamented that the crisis had exposed a flaw in the philosophy that he had promoted for more than forty years. “What I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.” Not as distressed, certainly, as many other Americans.

Jake Whitney is a journalist in New York.

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