All the Devils Are Here [233]
6
It should be noted that although both Spitzer and the SEC would soon bring charges against Greenberg, he has never gone to trial for any alleged wrongdoing. Although five people were convicted in the Gen Re case, including an AIG executive, Greenberg was not a part of that case, even though he was an unindicted coconspirator. And although Greenberg eventually settled with the SEC, neither admitting nor denying guilt, as of this writing he has yet to settle with the New York attorney general’s office. Throughout, Greenberg has consistently denied any wrongdoing.
7
Through his attorney, Frost denies being upset, and says that he was “part of the process.”
8
YSP stands for yield spread premium. Ostensibly it means a deal in which the borrower agrees to a higher interest rate in return for lower up-front costs. But during the bubble, YSPs were horribly abused, and the phrase YSP came to refer to the rebate that brokers got for putting borrowers into higher-interest loans. Elizabeth Warren, the Harvard law professor and well-known financial consumer advocate, calls them “hidden kickbacks.”
9
Countrywide later paid $600 million to settle the suit, while denying the allegations.
10
A Gissinger defender says that this is inaccurate, and that Gissinger and McMurray had a professional working relationship.
11
In that same memo, Mozilo noted that while purchase loans—loans used to actually purchase a house—had increased from 19 percent of Countrywide’s subprime business in 2001 to 33 percent in 2006, the other two-thirds of its subprime loans were refinancings. In other words, even at Countrywide, this wasn’t really about putting people in homes.
12
Ironically, First Franklin had been founded by Bill Dallas, who later started Ownit, the mortgage lender in which Merrill owned a 20 percent stake.
13
According to a former government official, one of the biggest cheerleaders for the CSE program was SEC commissioner Annette Nazareth. In fact, the CSE program was based on something called Basel II, an update of the original Basel rules, which was being widely implemented in Europe and which allowed banks to lower their capital requirements significantly, resulting in a much higher leverage ratio. But Basel II never went into effect in this country, despite the urging of the big banks and the Federal Reserve, largely because of resistance from the FDIC. According to this same former official, the “chief proselytizer for Basel II” at the Fed was Federal Reserve vice chairman Roger Ferguson. As it happens, Ferguson and Nazareth are married.
14
Three New Century executives later settled with the SEC, neither admitting nor denying guilt, over charges that they failed to disclose important negative information.
15
Washington Mutual executives also worried about Goldman Sachs. E-mails exchanged between WaMu CEO Kerry Killinger and other executives in late 2007, when the thrift was looking for an investment banker, offer a perfect snapshot of the modern Goldman Sachs. Todd Baker, WaMu’s executive vice president, wanted to bring in Goldman.
“Hiring the best brains is always wise when the stakes are high,” Miller wrote in an e-mail to Killinger. “Goldman also has the strongest balance sheet, market heft and risk appetite to do many things themselves for us that others couldn’t as part of the solution. On the other hand... we always need to worry a little about Goldman because we need them more than they need us and the firm is run by traders.” Killinger wrote back, “I don’t trust Goldy on this. They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving CFC [Countrywide] advice.”
In fact, Goldman’s mortgage department had bought equity puts on WaMu’s stock when it was around $40 a share, meaning that Goldman would make money if the stock fell. By the summer of 2007, the department was also seeking permission to short Countrywide, IndyMac, Bear Stearns, Merrill Lynch, Lehman Brothers, Morgan Stanley, and MBIA.
16
In response to Levin’s charge that S&P refused to reevaluate