The Monster: Bait and Switch

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by Michael Hudson: Why
the IMF Meetings Failed



from the introduction to The
Monster: How a Gang of Predatory Lenders and Wall Street Bankers
Fleeced America – and Spawned a Global Crisis
by Michael Hudson.

A few weeks
after he started working at Ameriquest Mortgage, Mark Glover looked
up from his cubicle and saw a coworker do something odd. The guy
stood at his desk on the twenty-third floor of downtown Los Angeles’s
Union Bank Building. He placed two sheets of paper against the window.
Then he used the light streaming through the window to trace something
from one piece of paper to another. Somebody’s signature.

Glover was
new to the mortgage business. He was twenty-nine and hadn’t held
a steady job in years. But he wasn’t stupid. He knew about financial
sleight of hand – at that time, he had a check-fraud charge hanging
over his head in the L.A. courthouse a few blocks away. Watching
his coworker, Glover’s first thought was: How can I get away with
that? As a loan officer at Ameriquest, Glover worked on commission.
He knew the only way to earn the six-figure income Ameriquest had
promised him was to come up with tricks for pushing deals through
the mortgage-financing pipeline that began with Ameriquest and extended
through Wall Street’s most respected investment houses.

Glover and
the other twentysomethings who filled the sales force at the downtown
L.A. branch worked the phones hour after hour, calling strangers
and trying to talk them into refinancing their homes with high-priced
"subprime" mortgages. It was 2003, subprime was on the
rise, and Ameriquest was leading the way. The company’s owner, Roland
Arnall, had in many ways been the founding father of subprime, the
business of lending money to home owners with modest incomes or
blemished credit histories. He had pioneered this risky segment
of the mortgage market amid the wreckage of the savings and loan
disaster and helped transform his company’s headquarters, Orange
County, California, into the capital of the subprime industry. Now,
with the housing market booming and Wall Street clamoring to invest
in subprime, Ameriquest was growing with startling velocity.

Up and down
the line, from loan officers to regional managers and vice presidents,
Ameriquest’s employees scrambled at the end of each month to push
through as many loans as possible, to pad their monthly production
numbers, boost their commissions, and meet Roland Arnall’s expectations.
Arnall was a man "obsessed with loan volume," former aides
recalled, a mortgage entrepreneur who believed "volume solved
all problems." Whenever an underling suggested a goal for loan
production over a particular time span, Arnall’s favorite reply
was: "We can do twice that." Close to midnight Pacific
time on the last business day of each month, the phone would ring
at Arnall’s home in Los Angeles’s exclusive Holmby Hills neighborhood,
a $30 million estate that once had been home to Sonny and Cher.
On the other end of the telephone line, a vice president in Orange
County would report the month’s production numbers for his lending
empire. Even as the totals grew to $3 billion or $6 billion or $7
billion a month – figures never before imagined in the subprime
business – Arnall wasn’t satisfied. He wanted more. "He
would just try to make you stretch beyond what you thought possible,"
one former Ameriquest executive recalled. "Whatever you did,
no matter how good you did, it wasn’t good enough."

Inside Glover’s
branch, loan officers kept up with the demand to produce by guzzling
Red Bull energy drinks, a favorite caffeine pick-me-up for hardworking
salesmen throughout the mortgage industry. Government investigators
would later joke that they could gauge how dirty a home-loan location
was by the number of empty Red Bull cans in the Dumpster out back.
Some of the crew in the L.A. branch, Glover said, also relied on
cocaine to keep themselves going, snorting lines in washrooms and,
on occasion, in their cubicles.

The wayward
behavior didn’t stop with drugs. Glover learned that his colleague’s
art work wasn’t a matter of saving a borrower the hassle of coming
in to supply a missed signature. The guy was forging borrowers’
signatures on government-required disclosure forms, the ones that
were supposed to help consumers understand how much cash they’d
be getting out of the loan and how much they’d be paying in interest
and fees. Ameriquest’s deals were so overpriced and loaded with
nasty surprises that getting customers to sign often required an
elaborate web of psychological ploys, outright lies, and falsified
papers. "Every closing that we had really was a bait and switch,"
a loan officer who worked for Ameriquest in Tampa, Florida, recalled.
" ‘Cause you could never get them to the table if you were
honest." At companywide gatherings, Ameriquest’s managers and
sales reps loosened up with free alcohol and swapped tips for fooling
borrowers and cooking up phony paperwork. What if a customer insisted
he wanted a fixed-rate loan, but you could make more money by selling
him an adjustable-rate one? No problem. Many Ameriquest salespeople
learned to position a few fixed-rate loan documents at the top of
the stack of paperwork to be signed by the borrower. They buried
the real documents – the ones indicating the loan had an adjustable
rate that would rocket upward in two or three years – near
the bottom of the pile. Then, after the borrower had flipped from
signature line to signature line, scribbling his consent across
the entire stack, and gone home, it was easy enough to peel the
fixed-rate documents off the top and throw them in the trash.

At the downtown
L.A. branch, some of Glover’s coworkers had a flair for creative
documentation. They used scissors, tape, Wite-Out, and a photocopier
to fabricate W-2s, the tax forms that indicate how much a wage earner
makes each year. It was easy: Paste the name of a low-earning borrower
onto a W-2 belonging to a higher-earning borrower and, like magic,
a bad loan prospect suddenly looked much better. Workers in the
branch equipped the office’s break room with all the tools they
needed to manufacture and manipulate official documents. They dubbed
it the "Art Department."

At first, Glover
thought the branch might be a rogue office struggling to keep up
with the goals set by Ameriquest’s headquarters. He discovered that
wasn’t the case when he transferred to the company’s Santa Monica
branch. A few of his new colleagues invited him on a field trip
to Staples, where everyone chipped in their own money to buy a state-of-the-art
scanner-printer, a trusty piece of equipment that would allow them
to do a better job of creating phony paperwork and trapping American
home owners in a cycle of crushing debt.

Carolyn Pittman
was an easy target. She’d dropped out of high school to go to work,
and had never learned to read or write very well. She worked for
decades as a nursing assistant. Her husband, Charlie, was a longshoreman.
In 1993 she and Charlie borrowed $58,850 to buy a one-story, concrete
block house on Irex Street in a working-class neighborhood of Atlantic
Beach, a community of thirteen thousand near Jacksonville, Florida.
Their mortgage was government-insured by the Federal Housing Administration,
so they got a good deal on the loan. They paid about $500 a month
on the FHA loan, including the money to cover their home insurance
and property taxes.

Even after
Charlie died in 1998, Pittman kept up with her house payments. But
things were tough for her. Financial matters weren’t something she
knew much about. Charlie had always handled what little money they
had. Her health wasn’t good either. She had a heart attack in 2001,
and was back and forth to hospitals with congestive heart failure
and kidney problems.

Like many older
black women who owned their homes but had modest incomes, Pittman
was deluged almost every day, by mail and by phone, with sales pitches
offering money to fix up her house or pay off her bills. A few months
after her heart attack, a salesman from Ameriquest Mortgage’s Coral
Springs office caught her on the phone and assured her he could
ease her worries. He said Ameriquest would help her out by lowering
her interest rate and her monthly payments.

She signed
the papers in August 2001. Only later did she discover that the
loan wasn’t what she’d been promised. Her interest rate jumped from
a fixed 8.43 percent on the FHA loan to a variable rate that started
at nearly 11 percent and could climb much higher. The loan was also
packed with more than $7,000 in up-front fees, roughly 10 percent
of the loan amount.

Pittman’s mortgage
payment climbed to $644 a month. Even worse, the new mortgage didn’t
include an escrow for real-estate taxes and insurance. Most mortgage
agreements require home owners to pay a bit extra – often about
$100 to $300 a month – which is set aside in an escrow account
to cover these expenses. But many subprime lenders obscured the
true costs of their loans by excluding the escrow from their deals,
which made the monthly payments appear lower. Many borrowers didn’t
learn they had been tricked until they got a big bill for unpaid
taxes or insurance a year down the road.

That was just
the start of Pittman’s mortgage problems. Her new mortgage was a
matter of public record, and by taking out a loan from Ameriquest,
she’d signaled to other subprime lenders that she was vulnerable – that
she was financially unsophisticated and was struggling to pay an
unaffordable loan. In 2003, she heard from one of Ameriquest’s competitors,
Long Beach Mortgage Company.

Pittman had
no idea that Long Beach and Ameriquest shared the same corporate
DNA. Roland Arnall’s first subprime lender had been Long Beach Savings
and Loan, a company he had morphed into Long Beach Mortgage. He
had sold off most of Long Beach Mortgage in 1997, but hung on to
a portion of the company that he rechristened Ameriquest. Though
Long Beach and Ameriquest were no longer connected, both were still
staffed with employees who had learned the business under Arnall.

A salesman
from Long Beach Mortgage, Pittman said, told her that he could help
her solve the problems created by her Ameriquest loan. Once again,
she signed the papers. The new loan from Long Beach cost her thousands
in up-front fees and boosted her mortgage payments to $672 a month.

reclaimed her as a customer less than a year later. A salesman from
Ameriquest’s Jacksonville branch got her on the phone in the spring
of 2004. He promised, once again, that refinancing would lower her
interest rate and her monthly payments. Pittman wasn’t sure what
to do. She knew she’d been burned before, but she desperately wanted
to find a way to pay off the Long Beach loan and regain her financial
bearings. She was still pondering whether to take the loan when
two Ameriquest representatives appeared at the house on Irex Street.
They brought a stack of documents with them. They told her, she
later recalled, that it was preliminary paperwork, simply to get
the process started. She could make up her mind later. The men said,
"sign here," "sign here," "sign here,"
as they flipped through the stack. Pittman didn’t understand these
were final loan papers and her signatures were binding her to Ameriquest.
"They just said sign some papers and we’ll help you,"
she recalled.

To push the
deal through and make it look better to investors on Wall Street,
consumer attorneys later alleged, someone at Ameriquest falsified
Pittman’s income on the mortgage application. At best, she had an
income of $1,600 a month – roughly $1,000 from Social Security
and, when he could afford to pay, another $600 a month in rent from
her son. Ameriquest’s paperwork claimed she brought in more than
twice that much – $3,700 a month.

The new deal
left her with a house payment of $1,069 a month – nearly all
of her monthly income and twice what she’d been paying on the FHA
loan before Ameriquest and Long Beach hustled her through the series
of refinancings. She was shocked when she realized she was required
to pay more than $1,000 a month on her mortgage. "That broke
my heart," she said.

For Ameriquest,
the fact that Pittman couldn’t afford the payments was of little
consequence. Her loan was quickly pooled, with more than fifteen
thousand other Ameriquest loans from around the country, into a
$2.4 billion "mortgage-backed securities" deal known as
Ameriquest Mortgage Securities, Inc. Mortgage Pass-Through Certificates
2004-R7. The deal had been put together by a trio of the world’s
largest investment banks: UBS, JPMorgan, and Citigroup. These banks
oversaw the accounting wizardry that transformed Pittman’s mortgage
and thousands of other subprime loans into investments sought after
by some of the world’s biggest investors. Slices of 2004-R7 got
snapped up by giants such as the insurer MassMutual and Legg Mason,
a mutual fund manager with clients in more than seventy-five countries.
Also among the buyers was the investment bank Morgan Stanley, which
purchased some of the securities and placed them in its Limited
Duration Investment Fund, mixing them with investments in General
Mills, FedEx, JC Penney, Harley-Davidson, and other household names.

It was the
new way of Wall Street. The loan on Carolyn Pittman’s one-story
house in Atlantic Beach was now part of the great global mortgage
machine. It helped swell the portfolios of big-time speculators
and middle-class investors looking to build a nest egg for retirement.
And, in doing so, it helped fuel the mortgage empire that in 2004
produced $1.3 billion in profits for Roland Arnall.

In the first
years of the twenty-first century, Ameriquest Mortgage unleashed
an army of salespeople on America. They numbered in the thousands.
They were young, hungry, and relentless in their drive to sell loans
and earn big commissions. One Ameriquest manager summed things up
in an e-mail to his sales force: "We are all here to make as
much fucking money as possible. Bottom line. Nothing else matters."
Home owners like Carolyn Pittman were caught up in Ameriquest’s
push to become the nation’s biggest subprime lender.

The pressure
to produce an ever-growing volume of loans came from the top. Executives
at Ameriquest’s home office in Orange County leaned on the regional
and area managers; the regional and area managers leaned on the
branch managers. And the branch managers leaned on the salesmen
who worked the phones and hunted for borrowers willing to sign on
to Ameriquest loans. Men usually ran things, and a frat-house mentality
ruled, with plenty of partying and testosterone-fueled swagger.
"It was like college, but with lots of money and power,"
Travis Paules, a former Ameriquest executive, said. Paules liked
to hire strippers to reward his sales reps for working well after
midnight to get loan deals processed during the end-of-the-month
rush. At Ameriquest branches around the nation, loan officers worked
ten- and twelve-hour days punctuated by "Power Hours"
– do-or-die telemarketing sessions aimed at sniffing out borrowers
and separating the real salesmen from the washouts. At the branch
where Mark Bomchill worked in suburban Minneapolis, management expected
Bomchill and other loan officers to make one hundred to two hundred
sales calls a day. One manager, Bomchill said, prowled the aisles
between desks like "a little Hitler," hounding salesmen
to make more calls and sell more loans and bragging he hired and
fired people so fast that one peon would be cleaning out his desk
as his replacement came through the door. As with Mark Glover in
Los Angeles, experience in the mortgage business wasn’t a prerequisite
for getting hired. Former employees said the company preferred to
hire younger, inexperienced workers because it was easier to train
them to do things the Ameriquest way. A former loan officer who
worked for Ameriquest in Michigan described the company’s business
model this way: "People entrusting their entire home and everything
they’ve worked for in their life to people who have just walked
in off the street and don’t know anything about mortgages and are
trying to do anything they can to take advantage of them."

was not alone. Other companies, eager to get a piece of the market
for high-profit loans, copied its methods, setting up shop in Orange
County and helping to transform the county into the Silicon Valley
of subprime lending. With big investors willing to pay top dollar
for assets backed by this new breed of mortgages, the push to make
more and more loans reached a frenzy among the county’s subprime
loan shops. "The atmosphere was like this giant cocaine party
you see on TV," said Sylvia Vega-Sutfin, who worked as an account
executive at BNC Mortgage, a fast-growing operation headquartered
in Orange County just down the Costa Mesa Freeway from Ameriquest’s
headquarters. "It was like this giant rush of urgency."
One manager told Vega-Sutfin and her coworkers that there was no
turning back; he had no choice but to push for mind-blowing production
numbers. "I have to close thirty loans a month," he said,
"because that’s what my family’s lifestyle demands."

Michelle Seymour,
one of Vega-Sutfin’s colleagues, spotted her first suspect loan
days after she began working as a mortgage underwriter at BNC’s
Sacramento branch in early 2005. The documents in the file indicated
the borrower was making a six-figure salary coordinating dances
at a Mexican restaurant. All the numbers on the borrower’s W-2 tax
form ended in zeros – an unlikely happenstance – and the Social
Security and tax bite didn’t match the borrower’s income. When Seymour
complained to a manager, she said, he was blasé, telling
her, "It takes a lot to have a loan declined."

BNC was no
fly-by-night operation. It was owned by one of Wall Street’s most
storied investment banks, Lehman Brothers. The bank had made a big
bet on housing and mortgages, styling itself as a player in commercial
real estate and, especially, subprime lending. "In the mortgage
business, we used to say, ‘All roads lead to Lehman,’ " one
industry veteran recalled. Lehman had bought a stake in BNC in 2000
and had taken full ownership in 2004, figuring it could earn even
more money in the subprime business by cutting out the middleman.
Wall Street bankers and investors flocked to the loans produced
by BNC, Ameriquest, and other subprime operators; the steep fees
and interest rates extracted from borrowers allowed the bankers
to charge fat commissions for packaging the securities and provided
generous yields for investors who purchased them. Up-front fees
on subprime loans totaled thousands of dollars. Interest rates often
started out deceptively low – perhaps at 7 or 8 percent –
but they almost always adjusted upward, rising to 10 percent, 12
percent, and beyond. When their rates spiked, borrowers’ monthly
payments increased, too, often climbing by hundreds of dollars.
Borrowers who tried to escape overpriced loans by refinancing into
another mortgage usually found themselves paying thousands of dollars
more in backend fees – "prepayment penalties" that
punished them for paying off their loans early. Millions of these
loans – tied to modest homes in places like Atlantic Beach,
Florida; Saginaw, Michigan; and East San Jose, California –
helped generate great fortunes for financiers and investors. They
also helped lay America’s economy low and sparked a worldwide financial

The subprime
market did not cause the U.S. and global financial meltdowns by
itself. Other varieties of home loans and a host of arcane financial
innovations – such as collateralized debt obligations and credit
default swaps – also came into play. Nevertheless, subprime played
a central role in the debacle. It served as an early proving ground
for financial engineers who sold investors and regulators alike
on the idea that it was possible, through accounting alchemy, to
turn risky assets into "Triple-A-rated" securities that
were nearly as safe as government bonds. In turn, financial wizards
making bets with CDOs and credit default swaps used subprime mortgages
as the raw material for their speculations. Subprime, as one market
watcher said, was "the leading edge of a financial hurricane."

This book tells
the story of the rise and fall of subprime by chronicling the rise
and fall of two corporate empires: Ameriquest and Lehman Brothers.
It is a story about the melding of two financial cultures separated
by a continent: Orange County and Wall Street.

and its strongest competitors in subprime had their roots in Orange
County, a sunny land of beauty and wealth that has a history as
a breeding ground for white-collar crime: boiler rooms, S&L
frauds, real-estate swindles. That history made it an ideal setting
for launching the subprime industry, which grew in large measure
thanks to bait-and-switch salesmanship and garden-variety deception.
By the height of the nation’s mortgage boom, Orange County was home
to four of the nation’s six biggest subprime lenders. Together,
these four lenders – Ameriquest, Option One, Fremont Investment
& Loan, and New Century – accounted for nearly a third of
the subprime market. Other subprime shops, too, sprung up throughout
the county, many of them started by former employees of Ameriquest
and its corporate forebears, Long Beach Savings and Long Beach Mortgage.

Lehman Brothers
was, of course, one of the most important institutions on Wall Street,
a firm with a rich history dating to before the Civil War. Under
its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of
the nation’s shadiest subprime lenders, including Ameriquest. "Lehman
never saw a subprime lender they didn’t like," one consumer
lawyer who fought the industry’s abuses said. Lehman and other Wall
Street powers provided the financial backing and sheen of respectability
that transformed subprime from a tiny corner of the mortgage market
into an economic behemoth capable of triggering the worst economic
crisis since the Great Depression.

A long list
of mortgage entrepreneurs and Wall Street bankers cultivated the
tactics that fueled subprime’s growth and its collapse, and a succession
of politicians and regulators looked the other way as abuses flourished
and the nation lurched toward disaster: Angelo Mozilo and Countrywide
Financial; Bear Stearns, Washington Mutual, Wells Fargo; Alan Greenspan
and the Federal Reserve; and many more. Still, no Wall Street firm
did more than Lehman to create the subprime monster. And no figure
or institution did more to bring subprime’s abuses to life across
the nation than Roland Arnall and Ameriquest.

Among his employees,
subprime’s founding father was feared and admired. He was a figure
of rumor and speculation, a mysterious billionaire with a rags-to-riches
backstory, a hardscrabble street vendor who reinvented himself as
a big-time real-estate developer, a corporate titan, a friend to
many of the nation’s most powerful elected leaders. He was a man
driven, according to some who knew him, by a desire to conquer and
dominate. "Roland could be the biggest bastard in the world
and the most charming guy in the world," said one executive
who worked for Arnall in subprime’s early days. "And it could
be minutes apart." He displayed his charm to people who had
the power to help him or hurt him. He cultivated friendships with
politicians as well as civil rights advocates and antipoverty crusaders
who might be hostile to the unconventional loans his companies sold
in minority and working-class neighborhoods. Many people who knew
him saw him as a visionary, a humanitarian, a friend to the needy.
"Roland was one of the most generous people I have ever met,"
a former business partner said. He also left behind, as another
former associate put it, "a trail of bodies" – a
succession of employees, friends, relatives, and business partners
who said he had betrayed them. In summing up his own split with
Arnall, his best friend and longtime business partner said, "I
was screwed." Another former colleague, a man who helped Arnall
give birth to the modern subprime mortgage industry, said: "Deep
down inside he was a good man. But he had an evil side. When he
pulled that out, it was bad. He could be extremely cruel."
When they parted ways, he said, Arnall hadn’t paid him all the money
he was owed. But, he noted, Arnall hadn’t cheated him as badly as
he could have. "He fucked me. But within reason."

Roland Arnall
built a company that became a household name, but shunned the limelight
for himself. The business partner who said Arnall had "screwed"
him recalled that Arnall fancied himself a puppet master who manipulated
great wealth and controlled a network of confederates to perform
his bidding. Another former business associate, an underling who
admired him, explained that Arnall worked to ingratiate himself
to fair-lending activists for a simple reason: "You can take
that straight out of The Godfather: ‘Keep your enemies close.’

with permission from Times Books/Henry Holt and Company.

28, 2010

Hudson is President of The Institute for the Study of Long-Term
Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished
Research Professor of Economics at the University of Missouri, Kansas
City and author of Super-Imperialism:
The Economic Strategy of American Empire

(1968 & 2003), Trade,
Development and Foreign Debt

(1992 & 2009), and of The
Myth of Aid

(1971). Visit his website.

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