Book review: 'Chain of Blame' brings subprime mess to life

There's no time like the present to read this one. Talk about a whopping tale — and it happens to be true.

In Chain of Blame, authors Paul Muolo and Mathew Padilla, both seasoned financial journalists, skillfully lead readers through the quagmire of what went wrong inside the nation's subprime-lending firms that led to the current mortgage and credit crises.

Their central premise: "Wall Street's thirst for profits and its near-total disregard for loan quality inflicted massive damage on the U.S. and world economies."

Anyone who has turned on the news lately has been bombarded by reports of the government's 11th-hour bailouts of big insurer AIG, investment bank Bear Stearns and mortgage giants Fannie Mae and Freddie Mac.

If you wonder what the heck is going on, this compelling tale will help you understand. The authors relay an unbiased take on how Wall Street got tangled up in the world of mortgages. They unravel what went on behind the scenes in the housing and mortgage industry for much of the past decade.

It's complex and confusing, but there's much to learn. Moreover, they bring to life the personalities behind the scenes who piloted the industry into uncharted territory.

Bigger risks

The duo home in on the years 2000 to 2007, when executives from Merrill Lynch, Bear Stearns, Lehman Bros. and others provided financing to subprime lenders. The lenders had lured home buyers with exotic mortgages originated by independent brokers. Wall Street then sold bonds backed by mortgages to investors in Europe and Asia.

Encouraged by low interest rates after the 9/11 attacks, banks and non-bank mortgage lenders began to take bigger risks. Home prices climbed. Unrestrained growth and unbridled greed threw diligence out the window. As we know now, these years of wobbly subprime mortgage lending caught up with the housing market, prompting a drop in home prices and a flood of foreclosures that rippled throughout the financial systems. That, in turn, hurt investors who'd bought securities backed by the bad debt, sparking a worldwide credit crisis.

That's a tad too simplistic, but it's the story in a nutshell. The slimy business of taking advantage of home buyers with hidden fees and ballooning rates is just a small bite of what went on in the heyday of home loans.

To help readers keep track of the subprime players, a three-page cast of characters appears in the book's first pages. There's also an eight-page glossary for boning up on the arcane lingo of mortgage finance.

Much of the story, rooted in Southern California, is built around two key players: Angelo Mozilo, founder and CEO of Countrywide Financial, America's largest home mortgage lender, and the late Roland Arnall, founder of Ameriquest Mortgage and wholesale lender Argent Mortgage, former ambassador to the Netherlands and a President Bush political donor.

Risky lending

Mozilo, over 40 years, had taken a tiny, obscure company to the top of the heap in making home mortgages to Americans. His thirst to be No. 1 in lending blinded him to the risk of lending to people with dubious credit histories, according to Muolo.

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