All the Devils Are Here [56]
There is also no question that the problems with subprime lending weren’t a secret. After the crisis of 2008, a common refrain arose that no one saw it coming. But that was never true. State attorneys general had filed lawsuits. Housing advocates had continually beaten the tom-toms. Repeatedly and in graphic detail, Congress and the regulators—including Greenspan—had been told what was happening on the ground.
Robert Gnaizda, then the general counsel of the Greenlining Institute, which, among other things, advocates for consumer protections for people of diverse backgrounds, started meeting with the Fed chairman in the early 1990s. He raised the problem of the many mortgage originators that existed outside the banking system and were unsupervised by any federal agency. “We won’t argue about whether federal regulators are doing a good job,” Gnaizda says he told Greenspan. “Let’s look at the unregulated lenders.”
“He had no objections other than saying he wouldn’t do anything,” Gnaizda says now. “He was very gracious and polite, but there was also an imperious quality to him.”
A few years later, Gnaizda and John Gamboa, Greenlining’s executive director, met with Greenspan again. In advance of the meeting, Gnaizda had sent the Fed a pile of loan documents, which Greenspan had read. “Even if you had a doctorate in math, you wouldn’t understand these instruments and their implications,” Greenspan acknowledged during the meeting. The Fed chairman had just given a speech in which he had famously recommended adjustable-rate mortgages. Gamboa asked Greenspan if he had an adjustable-rate mortgage. “No,” replied Greenspan. “I like certainty.”
John Taylor, of the National Community Reinvestment Coalition, was another housing activist who used to meet with the Fed. “Their response was that the market would correct any problems,” Taylor says. “Greenspan in particular believed that the market would not produce, and investment banks would not buy, loans that did not make sense. He genuinely believed that.”
But anyone who knew anything about the subprime business could see that wasn’t true. A prototypical example was First Alliance Mortgage Company, or Famco. A star of the early subprime scene, Famco went public in 1996, allowing its founder and his wife to take $135 million out of the company. Within two years, however, its abuses had become so widespread, and so well known, that several state attorneys sued to force the company to stop.
Famco’s abuses were not the result of a few bad apples; they were baked into the company’s business model. As former loan officer Greg Walling explained in an affidavit, Famco recruited top auto salesmen who knew nothing about mortgages and had them memorize something called the “Track,” which was a how-to for the hard sell. They were taught never to tell customers that a teaser rate meant their interest rate would increase. They were never to divulge the actual principal amount of the loan; if they did, the customers would be able to see the enormous fees that Famco had tacked on. The sales force, meanwhile, was highly motivated to charge the highest fees it could get away with: big commissions kicked in when the fees exceeded fifteen points. According to the Massachusetts lawsuit, an incredible 35 percent of Famco mortgages in Massachusetts had fees over 20 percent.
Did Wall Street know what was going on? You bet it did. Famco told its investors that most of its subprime loans went to people with relatively good credit—which meant borrowers were essentially being ripped off, since they didn’t need to pay a big fee to get a good rate. In 1995, Eric Hibbert, a Lehman Brothers executive, wrote a memo, later obtained by both the Wall Street Journal and the New York Times, describing Famco as a “sweat shop” specializing in “high-pressure sales for people who are in a weak state.” He added, “It is a requirement to leave your ethics at the door.”
Did Lehman Brothers then decide it couldn’t do business with a company as sleazy