All the Devils Are Here [57]
In 2000, Famco declared bankruptcy. A jury later found that the company had systematically defrauded borrowers. Lehman was found guilty of “aiding and abetting the fraudulent scheme.” But the firm’s punishment—a $5 million fine—was negligible. This was market discipline? Good practices driving bad ones out? It was just the opposite: bad practices were driving out the good ones. In the mortgage industry at least, Greenspan’s beloved theory was being blown to smithereens on a daily basis. And still he refused to do anything.
Actually, that wasn’t quite true. In the spring of 2000, Greenspan announced the formation of a nine-agency task force, including all the bank supervisors, to look into predatory lending. By then, the complaints and lawsuits had become so numerous that Washington officials could scarcely keep ignoring them. The Senate had held hearings. Three prominent senators, including Paul Sarbanes, the ranking Democrat on the Senate banking committee, introduced bills to ban predatory lending. The Treasury Department and HUD put together a National Predatory Lending Task Force. Its conclusion in a 2000 report: “Treasury and HUD believe that new legislation and new regulation are both essential.” The Federal Trade Commission started bringing cases.
Sarbanes, for one, knew the terrible damage predatory loans could do; Baltimore, in his home state of Maryland, had been hit hard by rising foreclosures, many of them the result of subprime lending abuses. But the chairman of the Senate banking committee, Phil Gramm, opposed any move to regulate subprime lending. His staff at the Senate banking committee issued a report saying that it made no sense to regulate predatory lending practices because it was impossible even to say what predatory lending was. To do otherwise, the report said, “threatens to subject those regulated to the abuses of arbitrary and capricious governmental action at worst.”
For that matter, Greenspan’s task force was more a sop to Congress than a serious effort to grapple with the problem. Actions mattered more than words, and Greenspan didn’t act. The Fed’s preferable solution seemed to be more disclosure, so that borrowers could better understand the terms of their loans and make informed decisions. More disclosure appealed to his libertarian instincts. But as everyone in the mortgage business knew, increased disclosure had done virtually nothing to stamp out lender abuses. Over the years, there had been numerous disclosure requirements added to the law. Yet to the average home buyer, mortgage documents remained largely incomprehensible. “I don’t think there is such a thing as a real sophisticated borrower,” Bill Dallas, who founded a subprime company called First Franklin in the 1970s, told the American Banker in 1998. “Basically they put their lives in the hands of originators, and we guide them.” Phil Lehman, an assistant attorney general in North Carolina, described disclosure statutes to Fed officials in 2000 as “the last refuge of scoundrels.”
One thing the Federal Reserve was required to do under the 1994 HOEPA law was hold hearings from time to time, to gain an understanding of the latest problems in the lending industry. In 2000, it held a series of HOEPA hearings in San Francisco, Charlotte, Boston, and Chicago. For anyone trying to understand why regulators were having so much trouble dealing with predatory lending, these hearings were an illumination.
The man who chaired them was Edward Gramlich, a Federal Reserve governor. Ned Gramlich was an unusual Fed governor. Despite a stint as a Fed research economist decades earlier, he had