When I was in college, I took a sociology course from a very bright professor, who told us that certain industries, including banking, avoid hiring intelligent people because they ask too many questions. It certainly does seem that the folks who have brought us he latest housing bubble are none too smart. Consider Angelo R. Mozilo, chief executive of Countrywide Financial, a company that was an innovator in subprime lending. Here’s Mr. Mozilo in this morning’s Times, reacting to comments from St. Louis Fed President William Poole, who, with amazing hindsight, blamed bankers like Mr. Mozilo for the current collapse of the housing and stock market:
Angelo R. Mozilo, Countrywide’s chief executive, doesn’t think he should be blamed. Talking to analysts this week, he called Mr. Poole’s comments “unbelievable” and criticized the Fed for first raising interest rates and then forcing banks to tighten their lending standards.
When an analyst suggested that Countrywide, the country’s largest mortgage lender, should not have made those loans, Mr. Mozilo sounded as if he had no more choice than a lemming going over the cliff.
“Our place in the industry would have changed dramatically because we would have arbitrarily made a decision that was contrary to what everything appeared to be — values going up and no delinquencies, no foreclosures — and we suddenly stop the music,” he said.
“Nobody saw this coming,” he added.
Apparently Mr. Poole is to home mortgage lending as Condoleeza Rice is to fighting terrorism.
But how can I criticize? How could anyone see this coming? They had an ironclad business plan.
First, find a person who has bad credit. Lend that person 100% of a mortgage on a home, 80% at an initial low rate that balloons beyond what they can pay in a mere two years, and finance the 20% balance at a fixed, high rate. Look the other way when scam artists loan brokers like Jose Guzman submit loan applications that overstate borrower’s incomes. Now, do the same thing a few million more times and sell the debt to suckers even stupider than you. When those rates balloon the buyer can always refinance or sell at a higher price to someone else, because real estate prices will just continue to rise.
What could go wrong?
What’s that you say? How can the pool of people with bad credit bail each other out of these loans at ever higher prices when wages for the working and middle classes are stagnant? Isn’t all this just a variant on a Ponzi scheme? Won’t we end up with an astronomical rate of default? Sorry, I can’t hear you.
Of course, besides normal ordinary people who nobody listens to, there were people with national platforms who saw this coming. Paul Krugman has been writing about the coming housing collapse for years, see, e.g., Running Out of Bubbles and That Hissing Sound from May and August of 2005.
But the fact is, folks like Mozilo have no incentive to see the obvious, anymore than Mr. Ponzi did. They have even less, because what they do is perfectly legal. They’ll walk away with millions, leaving us holding the bag. Maybe my old professor had it wrong.
Post a Comment