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Wall Street’s Role in the U.S. Mortgage Crisis Examined

As part of an ongoing series of conversations on recent U.S. economic woes, Paul Muolo co-author of "Chain of Blame: How Wall Street Caused The Mortgage and Credit Crisis" discusses his investiation into Wall Street's connection to the current housing and mortgage crisis.

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  • MARGARET WARNER:

    A new book says Wall Street is responsible for setting off today's economic woes. The book is called "Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis." Its co-author is Paul Muolo, who has long covered the lending industry as executive editor of National Mortgage News.

    Welcome, Paul.

  • PAUL MUOLO, Author:

    Thanks for having me.

  • MARGARET WARNER:

    So it wasn't the lenders; it wasn't the home-buyers. It's Wall Street that's at the root of all this? How so?

  • PAUL MUOLO:

    Well, they were the fuel guy on top. They had the big gasoline can of what we call "money," lending to these non-bank subprime lenders who in turn lent to consumers.

    Wall Street's end game here was to more or less take over what we call the non-prime mortgage industry and take all these loans, create bonds, make fees all along the way, and sell these bonds to investors overseas and in the U.S.

    If you take Wall Street out of the equation, this crisis is much, much smaller. They saw dollars in them thar hills. They saw gold, and they went after it.

  • MARGARET WARNER:

    And these loans were obviously risky?

  • PAUL MUOLO:

    Well, that's a good question. I mean, they were believing that home prices would keep going up forever in hot markets like Orange County, California, Florida, take your pick. They believe they'd always be bailed out by home equity. And if something went bad, they'd just sell the house and be out.

  • MARGARET WARNER:

    But what you're saying, it was really Wall Street and the availability of money, and their scheme — I don't say that pejoratively — but to them turn them into bonds, essentially to resell them, that changed the traditional model of lending?

  • PAUL MUOLO:

    Right. Most Americans might look to that movie, "It's a Wonderful Life," Bailey Building and Loan, where go into their S&L, their bank, they get a loan, they hold the mortgage forever. The model…

  • MARGARET WARNER:

    So your local banker cares about whether you can pay it back?

  • PAUL MUOLO:

    Well, usually. One of the things that changed with Wall Street in this non-prime model, they thought they had built a better mousetrap where they used these independent loan brokers. They get table-funded through a non-bank lender, which Wall Street's also financing.

    Wall Street takes all the loans. They outsource the underwriting, the review of the documents, to a company like Clayton. And then, again, they package the loans into bonds. They have as little cost as possible. They don't want full-time employees. They thought they had built a better mousetrap. That was their goal.

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