When Travis Paules worked as a branch manager for American General Finance in Pennsylvania in the late 1990s, he tried to do things by the book. He didn't cut corners, he recalls, because his bosses at the finance company made it clear that it didn't want him to cut corners, and that he should balance the need for loan production with the need to make sure his front-line staffers weren't sticking borrowers into deals they couldn't afford. Back then he liked to say: "My personal morals aren't good, but I have good business morals."
Things changed for Paules in 1998.
Ameriquest Mortgage, one of the nation's most aggressive home-loan shops, lured him away from American General. At Ameriquest, Paules recalls, he found an employer that encouraged – and rewarded – his unscrupulous instincts. Paules pushed his underlings to do whatever it took to book loans, and they responded by employing a variety of tricks, such as inflating borrowers' incomes on official documents. In some instances, he says, he even allowed his workers to alter the dollar figures on elderly borrowers' Social Security award letters.
I thought about Paules recently after I read an article in The New York Times by Chrystia Freeland, a global editor-at-large for Reuters. Freeland praised the work of investigative reporters who had exposed wrongdoing in the financial sector, but added that "the bigger, more complicated truth about the financial crisis is that it wasn't caused by evil businessmen. The overarching story is one of systemic failure, not individual wrongdoing. It wasn't the Bernie Madoffs who plunged the world into recession. It was low capital requirements, weak limits on leverage, over-the-counter traded derivatives, soft rules on mortgage lending and global financial imbalances."
Freeland is correct that all these factors contributed, in a big way, to the making of the crisis. But her argument has some holes in it.
First, it doesn't acknowledge that real people were behind the systemic failures. The financial crisis wasn't an act of nature; it was a man-made disaster. Corporate executives lobbied hard to get regulators to weaken oversight of banking and lending, pushing for the "soft rules" that helped create the home-loan mess.
Second, it minimizes the role that deception and corruption played in the debacle. As the housing market heated up, and the hunger for mortgage-backed investments grew, Travis Paules and other mortgage professionals cut corners and crossed lines. Appraisers falsified property reports. Mortgage brokers and loan officers forged borrowers' signatures on key paperwork and faked tax documents to qualify homeowners' for loans that they couldn't afford. Lenders and Wall Street banks misled investors about the quality of the loans and the quality of the securities that were backed by those loans.
Ameriquest agreed to pay $325 million to settle a nationwide lending-fraud investigation. Goldman Sachs, Wall Street's leading investment bank, will shell out $550 million to settle federal charges that it deceived investors about mortgage-related investments it created and peddled around the globe.
The parties responsible for the U.S. financial meltdown weren't cartoon villains. They were real people working on Wall Street and other corners of corporate America who were inspired by an anything-goes spirit and emboldened by the "systemic" changes that threw off many of the historic limits on banking and mortgage practices. You don't have to believe all businessmen are evil to take a look at the facts on the ground and conclude that fraud and irresponsible practices thrive in unchaperoned settings.
This lack of oversight allowed companies like to Ameriquest to embrace bait-and-switch salesmanship and other "boiler room" tactics. Paules and other Ameriquest employees became creatures of this environment. It was only after Paules left the company that his conscience began to kick in. He found religion and has tried since then to do what he can to set things right, by telling the story of his own "wickedness" as well as the mortgage industry's ugly behavior during the home-loan boom.
Understanding the history of the mortgage meltdown isn't an academic exercise. Officials in Washington and beyond are still working out the details of how financial reform will be put into action in the real world. Recognizing that fraud played a central role in the disaster is crucial to ensuring that reform succeeds. You can't cure systemic flaws without understanding that, when it comes to money, people will do just about anything if left to their own devices.
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