Sunday, December 21, 2008

Chain of Blame

I just finished reading Chain of Blame by Paul Muolo and Mathew Padilla.  The subtitle, "How Wall Street Caused the Mortgage and Credit Crisis," summarizes nicely the premise of the book.  My interest in the book is professional in that it tells the story of the collapse of the industry in which I have worked the past 17 years.  It is also personal in that it heavily covers my employer for most of those years, Countrywide Financial, and its CEO Angelo Mozilo, my uncle.

Since the revelation of the high default rate of subprime loans two years ago, many articles have been written, and news stories aired attempting to describe how it happened.  With few exceptions I have found that reporters rarely understand the topic they are attempting to cover, and the seem little concerned about inaccuracies in their stories.  Typical to the nature of today's media and culture, they simply searched for a villian.  Countrywide, as the universe's largest mortgage lender, was an easy target.  With the benefit of hindsight, anyone, even a talking head, or a grandstanding politician can see that mortgage lenders (including Countrywide) made some poor business decisions that led to grave consequences.  But there is much more to the story.  There is a complex web of players which the authors describe in personal detail.  Muolo and Padillas's book does an admirable job of laying out a historical context to the crisis as well as connecting all of the players in the mortgage loan market.

Muolo and Padilla described how Wall Street firms view the securitization of mortgage loans (specifically subprime) as a tremendous revenue generator.  The quality of those mortgages was largely ignored by the rating agencies, and misunderstood by investors.  The lenders funded loans based largely on what Wall Street would buy rather than prudent risk analysis.  It was the decline in housing prices nationally that started the delinquencies of loans, and ultimately the collapse in the credit markets.

There are some inaccuracies in the book to be sure, but overall it was very thorough and informative.  I also recommend reading the Conde Nast Portfolio (December 2008 issue) article titled, "The End," by Michael Lewis.  In this article Lewis (also the author of Liar's Poker) blasts Wall Street firms for their role in the financial crisis.

Have a Merry Christmas!

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