Banks: We’re breaking the law, OK?

60 Minutes (2/15/09)

How did the mortgage industry destroy itself and set off an economic collapse that ruined the finances of millions of Americans? Executives tend to hold themselves blameless, saying that no one could have seen the disaster coming.

Well, judge for yourself after you hear the story of Paul Bishop, who worked at the nation’s second largest savings and loan. World Savings Bank was among the industry’s most admired mortgage lenders. But Bishop says the kind of lending practices he saw were leading to a world of trouble that would ultimately result in billions in losses and a federal investigation.

What does Paul Bishop say he told executives at World Savings, three years before the crash?

“We’re breaking the law, okay? We’re breaking the law. You know we’re breaking the law. I know we’re breaking the law. What the hell do you think is going on here? You know, you’re granting too many people loans who simply can’t qualify,” Bishop told 60 Minutes correspondent Scott Pelley.

Bishop’s story is a rare inside look at forces that tore the economy apart, as seen by a plain-spoken loan salesman who is now suing World Savings, claiming that he was fired for telling executives what they didn’t want to hear.

“I definitely talked to him about Enron. I said, ‘We’re sitting on an Enron.’ This is…bigger than Enron. I mean, we’re doing four billion a month in loans. If housing drops, housing value drops, people start to default, you know? This is a nightmare. These people will not survive it,” Bishop told Pelley.

Bishop was a mortgage salesman at World Savings San Francisco Loan Origination Center. He’d been a top salesman at IBM and spent years as a stock broker. Most everywhere he went, he had a reputation for speaking his mind and ruffling feathers. He joined World in 2002, in part, because of its history.

Bishop says the owners were Herb and Marion Sandler.

“And their reputation at the time was what?” Pelley asked.

“It was flawless, near as I could tell,” Bishop said.

In fact, Herb and Marion Sandler were legendary. In 1963, they started Golden West Financial and grew to 285 branches under the name World Savings. The Sandlers’ were known for careful, conservative lending. They’ve given away millions of dollars to charity and started an advocacy group for low income borrowers called the Center for Responsible Lending.

In 2006, just before the housing crash, the Sandlers sold their bank to Wachovia and pocketed $2.3 billion.

Trouble is, some of their money came from people like Betty Townes, who is financially ruined after being sold a series of World Savings mortgages she couldn’t afford.

Asked how many times she refinanced, Townes said, “Well we refinanced practically every year.”

World salesmen convinced Betty to refinance her mortgage four times in four years. She got about $20,000 each time. “Well, all I know that they told me this loan was best for me,” she told Pelley.

But how could it be best when Betty’s pension couldn’t qualify her for the loans?

“They told me that they would go by my husband’s payroll,” she said.

“Even though he’d been laid off from the shipyard?” Pelley asked.

“No, he’d passed away,” Townes replied.

Letter to a friend

Here’s an item from today’s Washington Post that might interest you.

Sorry to hear you have to lay off people — that’s a hellish amount of stress on all sides. On the other hand, I’m glad it’s you and not some heartless bastard who will make the situation even worse and possibly cause the other party to go postal.

I look around me when I’m out running errands and I see lots of people whose faces are frozen masks of pain, anger and resentment. A reporter on a news program recently said how the people he interviews on the street are incensed at what’s been going on — and that the anger is beginning to turn to fear. Not good.

Entering “multiple robberies” on Google News returns pages and pages of results.

So, yes, you’re quite right about the possibility of a severe recession and that would be bad enough — add in all the effects of economic distress and … Well, you get the picture. Not to add to your troubles, but … forewarned is forearmed, right?

On the other hand, I’m mindful of the danger of self-fulfilling prophecies and of the fact that what happens tomorrow depends on what we do today.

As for me, I try to do everything I can to buck people up — including myself, ‘cuz it’s hard to be around people who are stressed out without absorbing some of their distress. Humor and kindness can work wonders, of course, as can helping people vent so that they can move past their anger toward problem-solving.

Do you know about all the networking sites like ecademy and LinkedIn? They’re among the oldest and the best of their kind — like Facebook, for adults, they can go a long way toward helping the unemployed find new opportunities and also alleviate social isolation, with all the problems that brings.

Anyway, those are my thoughts for the day. Please take good care of yourself, OK?

Mortgage Mess: Hall of Slime

Villains in the Mortgage Mess? Start at Wall Street. Keep Going. – washingtonpost.com
Once again, too many people had access to other people’s money with too little oversight. Once again, the White House, Congress and federal bank regulators failed to police the financial services industry because they mistook deregulation for a system without any reasonable rules. And now as then, our saga is chock-a-block with people and institutions deserving special mention in the Subprime Hall of Slime.

But make no mistake: Today’s crisis dwarfs the S&L fiasco. The eventual cost to taxpayers of this scandal is likely to make yesteryear’s culprits look like pikers.

The short version of how we got here: Lenders, fat with money made cheap by the federal government, aggressively coaxed millions of borrowers to take out unaffordable mortgages. They lent this money without assessing whether borrowers could repay it. They assumed, in fact, that most wouldn’t be able to and would have to refinance into new, equally unaffordable loans. This process would produce an endless cycle of fees for the lenders — but only if home prices rose, fairy-tale-like, forever.

On what planet would that be an acceptable business plan?