All the Devils Are Here [85]
On the other hand, how could he not have known? The company was constantly being hit with accusations, investigations, and lawsuits charging fraud and deceptive practices. “We were inundated with stories about the conduct of the sales personnel—everything from drug use and fraud to theft and gang affiliation,” says another former executive. At best, Arnall seemed to have practiced a kind of willful ignorance.
In January 2003, as questions about Ameriquest’s practices were heating up, the company hired a mortgage veteran named Ed Parker to investigate fraud in the branches. At first, Parker says, he was hopeful he would be given the authority to do the job right. In his first investigation, he helped shut down a branch in Michigan after looking at twenty-five hundred loan files and discovering that the loan officers were all using the same few appraisers to inflate the value of properties. The fraud wasn’t subtle—there would even be notes in the files spelling out the value the appraisers had been told to hit. Ameriquest repurchased the loans from lenders who had bought them.
But Parker says that other executives made comments that caused him to think they didn’t really want him to be such a zealot. He soon decided that, as he later put it, “I was not brought in to do a job. I was brought in to provide cover.” In Fresno, he discovered that branch employees were manipulating bank statements to make it appear that the prospective borrowers had more cash reserves than they did. They would cut and paste information from one borrower’s statement to another’s. Several of the implicated employees had been promoted to branch managers. At other California branches, Parker discovered that stated-income letters were being manufactured that misrepresented the age of elderly borrowers. One loan application stated that the borrower was a forty-four-year-old consultant who earned $8,000 a month. In fact, the borrower was seventy-four. In the Florida branches, says Parker, “there were just so many problems with the loans.” He would record what he found, send it to management—and nothing would happen. He says he was turned down for promotions, cut out of decision making, and eventually fired in July 2006. In a lawsuit Parker filed alleging employment discrimination, he claimed that Ameriquest was “engaged in massive fraud for years.” He says now, “My problem was, they did not want to know.”3
What Arnall’s defenders say—indeed, what all the defenders of the subprime originators would say after the fact—is that the true villains were not the lenders on Main Street but the investment firms on Wall Street. Wall Street, after all, was both making the warehouse loans on which the subprime companies depended and then buying up their mortgages and securitizing them. The Wall Street firms, in fact, were dictating what kind of mortgages they would buy and at what price. They wanted the riskiest subprime mortgages they could get their hands on, because those were the mortgages that generated the most yield. In a presentation to the board of directors, Washington Mutual executives noted that subprime loans were roughly seven times more profitable than prime mortgages, because the company could sell them for so much more. WaMu used to award its sales staff a bonus if they could tack on a prepayment penalty to the loan—which was something else Wall Street wanted.
“Wall Street set the product guidelines,” says a former Ameriquest executive. “I can’t say to the consumer, ‘Here’s your rate.’ Wall Street figures out what investors are willing to pay. They design it and they present it to you. If they say, ‘Don’t put it on my warehouse line,’ that means you can’t make the