"Chain of Blame": What went wrong with America's mortgage industry

"Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis"

by Paul Muolo and Mathew Padilla

Wiley, 338 pp., $27.95

When an institution wrecks itself, opportunity calls for those who chronicle its daily agonies. The news reporter can tell it all in a book, and make a story out of events that first came out in dribbles. Bob Woodward and Carl Bernstein did it with Nixon's downfall in "All the President's Men," and Paul Muolo and Matthew Padilla do the same for the troubles of the mortgage industry in "Chain of Blame."

Muolo covered the industry for National Mortgage News and Padilla covered it for The Orange County Register. Their book is a chronicle of its ruin.

It profiles company founders, like Angelo Mozilo of Countrywide Financial and Roland Arnall of Long Beach Mortgage, and financial inventors, like Lewie Ranieri, father of the financial instrument by which America's hangover has been shared with Europe and Japan. The book also tells the story of poisonous products such as "liar loans," in which a borrower with good credit could invent a high salary for the mortgage applicant, knowing that no one would check.

Who was to blame? The borrower who lied in order to buy a bigger house than he could afford? The broker who invited him to lie, in order to make more money? The wholesaler and the Wall Street investment banker who, together, had designed the liar loan, and made money by trading it? The rating agency that said liar-loan bonds were safe? Or the federal bank regulators, who, like Sherlock Holmes' dog, did not bark in the night?

Some blame goes to the Federal Reserve for pounding down short-term interest rates to 1 percent in June 2003, which meant, the authors say, "subprime lenders of all stripes could borrow money cheaply and lend it out." By late 2003, one-quarter of all new mortgages were "subprime," meaning not up to traditional standards.

The authors mostly blame the private sector, and particularly Wall Street, whose leaders were better educated than the mortgage hucksters on the air, and ought to have thought beyond the end of their noses. But they were making so much money that it paid not to think.

"Chain of Blame" is written for a general audience with an interest in business. It is told at the company level, with lots of people and quotations. The authors are skilled at sketching a character, as here with Brad Morrice of New Century Financial: "Overweight, with thin gray hair and glasses, he was ... an intellectual who enjoyed debating theories and sometimes analyzed decisions to death. ... He had one nervous tic: constantly saying 'um.' "

It is still a story about business people in offices and the making of loans. The authors use (and explain) such terms as ARMs, POAs, CDOs, REITs, ABS, MBS, FICO, AVM, LTV, AE, LO, FHLBB. Some are simple enough. "LO" is a loan officer. A "POA" is a payment-option adjustable-rate mortgage, which is one of the spears that poked a hole in Washington Mutual.

There is regrettably little here about WaMu, and nothing much about Fannie Mae and Freddie Mac. The story here is about companies that are now mostly ashes — and about a time in America, the authors write, when millions "treated their homes like ATMs" by taking on ever-more-fanciful kinds of debt.