Who's to blame?

“What the hell happened?” is what financial journalists Paul Muolo and Matthew Padilla seek to answer with their book, Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis. Opening with critiques of the many actors that caused the housing bubble expansion and ultimate burst, the book analyzes the multiple factors that caused the subprime industry meltdown and ultimate bank failure. Ultimately, the book’s chapters force readers to consider the “swarm of spectators, real estate agents, mortgage brokers, and lenders” that inflated and burst our international economy.

Muolo and Padilla trace the history of housing markets, paying particular attention to the period of 2000-2007, with the increased influence of subprime lenders beginning to cooperate with Wall Street firms. Peter Cugno poignantly observes the investment bankers from New York buying up subprime loans left and right as he states, “That was the beginning of the end as I remember it-when they started to see the potential for them to get hip-deep in this biz and suck our some serious money. But their mistake was that to do that, they needed to no longer be someone who put other’s together-but to saddle up, own the lender, and take on some serious risk.”

Business Week points out that “Thanks to brokerage firms such as Friedman Billings Ramsey and later all the big Wall Street houses, the subprime business mushroomed into a multi-trillion dollar orgy of sketchy loans, securitizations and all manner of financial exotica that we now see collapsing all around us” (Business Week Analysis November 24, 2008).

Scattered throughout the meltdown story is the theme of risky loans. Wall Street’s loan pool creation, the exception based loans, and willingness to underwrite despite noncompliance with guidelines, forced the companies to turn a blind eye even when the grading of loans took a downturn (Muolo and Padilla). The authors weave a tale of privatization, risky Adjustable-rate mortgages, selfish actors, and much more.

The domestic connection to the international economic downswing is concisely summarized in Muolo and Padilla’s chapter, “We Buried (Some of) our Garbage Overseas”. The brokers who took on loans, buying them up vigilantly, failed to realize how they sparked a worldwide credit crisis with the sale of bundled mortgages to European and Asian investors. In particular, the “overseas banks and investors were now suffering because the subprime collateralized debt obligations (CDOs) they had purchased from Wall Street firms were now defaulting, causing huge losses” across the Atlantic.

Muolo and Padilla highlight the interconnected relationships within the maze of residential mortgage actors who failed to follow national trends, while purchasing, securitizing and selling risky loans at the sake of interest based profit. The story is one of American mess sparking “an economic worldwide contagion” with “American bond salespeople…pulling the trigger” when home prices dropped, foreclosures flooded the market, and the effects flowed through the financial system.