This week we present a special treat; a sneak peek at Paul Muolo and co-author Mathew Padilla's book "CHAIN OF BLAME: How Wall Street Caused the Mortgage and Credit Crisis." Be sure to visit the website at
Each and every Wall Street firm playing in the subprime arena from 2002 to early 2007--the largest gold rush in mortgages since the inception of the mortgage-backed security (MBS) two decades earlier--had a three-pronged approach to sucking as many subprime loans as they could out of nondepositories like Ameriquest, New Century, Ownit Mortgage (Bill Dallas's last company), Aegis (Rick Thompson/Cerberus), or any other B&C, alt-A, or stated-income lender, most of which were headquartered in Orange County, California. The approach started with salespeople.
"The sales guys from the Street would come talk to you and hype you up," said one subprime executive from Irvine. "They would try to get you to do something. From Monday to Thursday you would make the loans, put all the data in a spreadsheet, and send it to the Street, and they'd call you back with their bids. By Friday your mistake would be in the marketplace."
From 2004 onward Steve Hultquist, executive vice president in charge of capital markets for Aegis in Houston, Texas, was visited once a week by salesmen from Bear Stearns, Merrill Lynch, and other investment banking houses that were searching for mortgages to securitize. Hultquist was in charge of alt-A loans (subprime in nature but with good FICO scores) and payment option ARMs (loans where the homeowners could keep their payment artificially low by increasing their future debt). The privately held Aegis used mostly loan brokers to gather mortgages. Why? Because if the loan broker didn't produce, it wouldn't cost Aegis a dime. If the broker brought a fundable loan to the company, only then would Aegis have to pay. There would be no benefits, medical plan, or 401(k) to worry about. That was the beauty of loan brokers, as Arnall and Mozilo could attest: less overhead to worry about.
Each and every morning Hultquist's team of account executives (AEs) would e-mail or fax Aegis rate sheets to thousands of loan brokers across the nation, telling them what type of mortgages they were willing to originate, and on what terms. The lists of loans that Aegis would fund were referred to as menus and included such essentials as how high the loan-to-value (LTV) ratio and borrower's debt-to-income (DTI) ratio could be. Hultquist and his subprime counterpart at Aegis, Soc Aramburu, didn't create their loan menus in a vacuum. Aegis sold its subprime and alt-A loans to any number of Wall Street firms, including Bear Stearns, Credit Suisse, Deutsche Bank, Greenwich Capital, and Merrill Lynch. If the Street wouldn't buy, there would be no loans to originate. As a nonbank wholesale lender, Aegis' menu was shaped almost entirely by its investors on Wall Street--what type of mortgages they were willing to buy. "The salesmen from the Street would come and pitch their products," said Hultquist, "and we would listen."
The initial approach from a Wall Street firm to a subprime executive didn't always start with a salesman. Sometimes the trader would just cold call a subprime manager he had met at an industry trade show or look at a ranking of top subprime lenders and dial his way through an automated phone system (if he didn't have a business card). But the action (the three-pronged approach) always started with a salesman or trader. It's the job of the salesman to "make the bell ring," so to speak. Next came the quant, short for quantitative analyst. It was the quant's job to analyze the loans the Street firm was purchasing--to look at the Excel spreadsheets coming in and make sure the product (mortgages) was up to snuff. "The quants are the ones who tell you why they are kicking stuff back," recalled one subprime executive...
