Subprime Mortgage Whistleblowers Warn Bigger Crash on Its Way
Whistleblowers Richard Bowen and Michael Winston, along with UMKC’s Bill Black, discuss the rampant fraud at Countrywide and Citigroup and how today’s high foreclosure rates in states like Nevada could be a sign of what’s to come
JESSICA DESVARIEUX, TRNN: Welcome to the Real News Network. I’m Jessica Desvarieux in Baltimore.
Here at the Real News, we don’t usually discuss Hollywood. But a couple of weeks ago we did a movie review of the film The Big Short with Real News regular and former financial regulator Bill Black. The film portrays the leadup to the 2008 financial crisis, and glorifies the betters who bet on the fraudulent mortgage-backed securities market to crumble. But as Bill Black observed, it ignored the real heroes: those who blew the whistle on the fraud happening in that housing market.
Well, some viewers expressed that they wanted to hear those whistleblowers, and now we are going to do just that. Now joining us is Wall Street whistleblower Richard Bowen. He was a business chief underwriter for Citigroup, where he monitored the credit quality of over $90 billion annually of purchase residential mortgage loans which were bundled up into mortgage-backed securities, which could then be traded on the open market. Also joining us is Michael Winston. He blew the whistle on Countrywide Financial for their reckless subprime lending practices. He’s also the author of the book World-Class Performance. And joining us, last but not least, is associate professor of economics and law at the University of Missouri Kansas City, Bill Black. And of course you know him, because he’s a Real News regular.
Thank you all for joining us.
BILL BLACK: Thank you.
DESVARIEUX: Great. So you know what, I’m going to start off with Richard, because I think it’s so important for us to understand this story. When did you exactly come forward and blow the whistle?
RICHARD BOWEN: Well, in early 2006 I was given a huge promotion, Jessica. I was named business chief underwriter over an area that purchased $90 billion a year in correspondent mortgages. These were originated by other mortgage companies. And it was my responsibility to make sure that these mortgages met our policy guidelines. So silly me, I started looking into it and trying to do my job. And I soon realized that in my largest channel, I discovered that over 60 percent of these mortgages that we were purchasing did not meet our guidelines. By definition, they were defective. Yet Citigroup was turning around, and when they sold those to Fannie Mae, Freddie Mac, or securitization, they were giving their representations. They were giving their guarantees, that those mortgages were not defective.
So I started blowing the whistle. I started issuing warnings. I sent email. I sent, put it in my weekly report. I cornered people in the hallways. And through 2006 and 2007, the volumes kept increasing, and the rates of defective mortgages increased from 60 percent in excess of 80 percent. So I, I knew I had to warn the board of directors, but I was struggling with how to do that when on November 2 of 2007, it hit all of the headlines that Citi had called an emergency board meeting for that coming Sunday.
So on November 3, Saturday morning, sitting at my kitchen table, I knew I had to get the warning to that board meeting. So I sent that email, the so-called Rubin email, to Robert Rubin, who the next day was named chairman of the board. And I also sent it to the other executive officers. And I told them about what I’d found. And that we had substantial unrecognized losses. And I pleaded with them, I even called for an outside investigation, I said come in here from the outside and investigate what’s going on here, because everybody here already knows.
Well, the–I think everyone knows how that turned out. I was told not to come back to the office, and this was not a fun time in my life, Jessica.
DESVARIEUX: Okay. I’m going to stop you there. We’ll talk about the aftermath. Michael, I want to get you into the conversation. Was your experience similar to Richard’s? Did you come forward and speak to those who were responsible for Countrywide? You were an executive there, right?
MICHAEL WINSTON: Yes.
DESVARIEUX: So what made you come forward?
WINSTON: Well, while I was still fairly new, having been there only a couple of months–. Actually, quite frankly, what made me come forward was a chance meeting in a parking lot with a fellow who had a sports car parked next to mine, to my car. And personalized plates that said, “FUND EM”. And being a curious sort, and also new to the company, I said, “FUND EM”, that’s an interesting plate. What do you suppose is meant by “FUND EM”? And the guy said, oh, that’s Angelo Mozilo’s growth strategy for 2006.
Well, how can “FUND EM” be a growth strategy? I didn’t understand, so I asked him. I still don’t understand, tell me more. And he said, well, anybody who wants a loan, we’ll give him a loan. Can’t be, I said. What if the person doesn’t have a job? And he hesitated briefly, and he said, fund ’em. And I said, what if he has no assets? Again, another hesitation. Fund ’em. What if the guy has no income? Which sort of, that’s the grand troika. You have no money to buy this house. And he said, fund ’em. And I said, I don’t understand, I’m new her. What are the criteria that you use in determining creditworthiness or lack thereof? And he looked at me, sort of smiled a sly smile, and had kind of a smug, arrogant, this guy doesn’t get where he is kind of look on his face. And he said, if they can fog a mirror, we’ll give them a loan.
This is the third week of November, 2005. This is way before anyone heard of an implosion. And I immediately thought oh my God, they’re giving loans to everybody. So I went up to Andrew Gissinger’s office. He and I knew one another just slightly, he was the president of Countrywide Home Loans, which was the largest operating entity in Countrywide Financial. Countrywide Financial was a holding company. And I sat down with him and I said, look, somebody’s not getting the message down through the troops. They’re thinking that your focus is on just, just give ’em a loan, give ’em a loan, give ’em a loan. Well, that’s the focus on quantity. And I explained to him that I had come from 12 years of Motorola, which was the originator and pioneer of Six Sigma, and that Motorola was a quality-focused company. And I said, well, you gotta stop rewarding people for how many of these loans you can generate, especially if the person doesn’t have the wherewithal to pay them back. And you gotta start focusing on quality.
Well, that day, which was I think September 25 or 26, that was the first of what was to be 19 meetings where I came up with all sorts of proposals on changing the vision, strategy, objectives, comp system. And I started getting a lot of requests for conversation with the highers-up. Angelo Mozilo, Dave Sambol, Stan Kurland. Stan was the then-president of Countrywide. And you know, my supposition was that there was a rebel somewhere down below. I didn’t realize that the guys that I was talking to, those were the levels, rebels, way on high.
And so I started questioning their long portfolios, showing them how to focus on quality, not quantity, showing them how to focus on all the constituencies, shareholders, employees, customers. And it was a real red light when they couldn’t identify for me who the customer was. And so–.
DESVARIEUX: It should be pretty obvious with a mortgage financial institution. I mean, the customer’s clearly the homeowner.
WINSTON: Well, that’s what one would think. But they never really spoke about or considered the homeowner. And so concurrent with that, or shortly thereafter, we confronted a, a safety and health issue with a toxic building. I hadn’t been housed in that building when the issue was confronted. My people were. But my people to me are a business family, so I’m going to advocate on their behalf no matter what, and I’m going to keep sticking with it. And I saw that people that had complained about shortness of breath, feels like there are cotton balls in my windpipe, I can’t get a deep breath. Feels like there’s some noxious fumes that are circulating around. And so I, I then went to the same level of people, Mozilo, in some instances higher up, and said, what are we going to do about this mitigation problem, ultimately learning that the answer was nothing.
WINSTON: Tell your people to stop being such crybabies, and they were people who were all of a sudden coming up with diagnoses of first-time asthma, pulmonary function disease. I was worried that somebody in the group might get cancer. And so I, I took it very high up and all of a sudden like, like Bill and like Dick, I thought I was just doing my job. My job was espoused to be, when they recruited me, over a five year period, as look, right now we’re a mortgage company. We want to become a broadly diversified financial services company at the world-class level. So Michael, think of us as Goldman Sachs on the Pacific. So I know a lot of people at Goldman Sachs, and a childhood friend of mine is one of the co-presidents, still, of Goldman Sachs. And Goldman Sachs had recruited me, twice. So I know what that means.
DESVARIEUX: Wait, Michael, I want to get Bill in the conversation. I’m just going to pause here, because we have so much more to talk about.
Bill, you heard Michael’s story, you heard Richard’s story. Both of them said they went from the inside, blew the whistle, and nothing happened. Bill, you’ve been a financial regulator. Why didn’t anyone do anything about this? Some might argue they should have maybe gone to the feds.
BLACK: So something did happen, of course, and it was the opposite of what would happen in an honest business. In an honest business if you had senior executives of this integrity bring these problems, you would say, thank God. You know, because it’s really hard, sometimes, in the C-suites to learn about these things, because people don’t want to tell you the truth. But here people did, and instead of fixing it they retaliated. So that, in a poker sense of the word ‘tell’, well you know, like the proverbial dog whose tail wags whenever they have a good hand playing poker, this is a classic tell that you’re dealing with a fraudulent operation, and as we’ve stressed, those frauds tend to come from the top. Fish rot from the head in the C-suites. And this is what both Michael and Richard found in the course of their practice.
And the other thing that we’ve emphasized is the fraud recipe and how you have to gut underwriting. And what you’ve just heard is these two stories of systematic destruction of loan underwriting, which makes absolutely no sense for an honest lender, but makes perfect sense under the fraud recipe. In the savings and loan debacle we never had a whistleblower of anything remotely like the quality of these two gentlemen that you’ve just heard. If we’d had, it would have been, you know, just–they’ve given the Justice Department a criminal case on a platinum platter against the most senior people in both of these massive lenders, and justice has done nothing with far less to start with, because we didn’t have whistleblowers of this quality. We were able to get convictions. Think how easy it would have been for the Justice Department given what you’ve just heard. These are two ideal witnesses to lead off your prosecutions.
DESVARIEUX: So, Richard, I want to go back to you. What is life like for you now?
BOWEN: Well, first of all, after I was told not to come in [the play], back to the bank, I actually went to the FCC, and I testified before the FCC. I gave them 1,000 pages of documents. I have since subsequently testified before the financial crisis inquiry commission. So it isn’t as if I, I’ve accepted being shut down within the bank internally. I actually went externally, and nothing happened also.
Life afterwards, obviously, life goes on. I am a full time professor of accounting here at the University of Texas at Dallas. I’m trying to do good. I’m trying to continually wake up the public as to what we are facing with the large banks. And you know, the threat that the large banks pose for us. I’ve said this repeatedly, I believe that the large banks have this country in a stranglehold, and they’re systematically gutting whatever regulations are there that are attempting to take control of them.
DESVARIEUX: Michael, you’re actually going toe-to-toe with one of those large banks, Bank of America. You sued them because they acquired Countrywide. Can you just talk about on what grounds did you sue them?
BOWEN: Well, now, that’s–you’re talking about Michael there.
DESVARIEUX: For Michael, yes. For Michael.
WINSTON: Yeah. Well, so I’m going to, I’m going to jump in on this explanation just, we’re addicted, because I went, I started at the bottom, ended up at the top. I went internally well before I went externally. And it sort of came to a head when I was asked to lie to a ratings agency, Moody’s Financial Services. I was asked to get in the company plane, travel, travel to New York, Wall Street, and fabricate–there had been an adverse report done of Countrywide by Moody’s Financial Services.
And having worked at Merrill Lynch, I worked across the street from Moody’s, and I knew the founder and president. And he knows me. And he would believe anything I told him, so of course, I would tell him the truth. Well, they didn’t want me to tell him the truth, and they first–you know, the carrot and sticks. So they incentivized me big time to throw out a whole series of lies, and then threatened me if I told the truth.
DESVARIEUX: Incentivized like giving you a bonus? What do you mean by that?
WINSTON: Well, these financial services companies, as Dick can concur, they have all sorts of wonderful toys they can give you. And some instances the least of which is financial. All sorts of things, like Sodom and Gomorrah toys, you know.
But instead–I wasn’t going to lie, so I told the guy, look, I’ve got almost 35 years of experience doing governance work, so I understand what you’re asking of me and why you’re asking it of me. And my words to him, which have been written about in a thousand articles, they were–but not combative. I said hey, look, I’m not your guy. It wasn’t, it wasn’t me–somebody, like, acted it. I’m not going to do–I just said, I’m not your guy. Clearly you have thousands of people standing around you who are willing to lie through their teeth for you, but it’s not me. So I asked one of them, because I’m not going to do it.
Well, what happened to me is kind of the same thing as happening, happened to the other guys. Except for me it happened in slow motion. I started getting retaliated against in every way imaginable, and in many ways not imaginable. And my, my dilemma was that I had recruited eight people who had worked on a Michael Winston team prior. They all came, so I couldn’t quit. So I was stuck there. And I’m seeing one of them, by the way, the day after tomorrow.
And so yes, I reached out to the SEC, the Justice Department, even locally the LA County DA, with evidence I had of fraud, market manipulation, insider trading, and then to add insult to injury retaliation and violation of public policy, which is a big one. And they were lying under oath. So I had a lot of, I’d never been to court before. And by the way, like these other guys, I never thought of myself as a whistleblower until I read it in the newspaper. I just thought I was–they told me they wanted world-class performance. I’ve been associated with companies who gave me that same charter, and Motorola, McDonnell Douglas, Lockheed, even Merrill Lynch. And we catapulted their performance to world class.
DESVARIEUX: So why did you sue Bank of America, though, Michael? I’m trying to understand that.
WINSTON: Oh, I, I, well, same reason I sued Countrywide. Bank of America was the acquiring company. They were the parent. Countrywide was then the child. And what I found was not a lack of interest in what I had to say. They were fascinated, the SEC was fascinated with what I had to say. The Justice Department. But what I found was that they weren’t going to do anything about it.
So we held endless meetings, but it was clear they weren’t going to do anything about it. And in the, in the interest of doing a, like, a public service, hey, forewarned is forearmed, you know, Mozilo, right up until the day they nearly went bankrupt, they were–he was using his bully pulpit to, to jump up more investments in his company. And so I had to bring a suit against Bank of America, the parent, and Countrywide, which was still around, to warn people, to expose their–I won’t call it reckless, because that’s not what it was. Reckless sounds like you don’t know what you’re doing. No. They were deliberate, consistent, institutionalized fraud, market manipulation, and insider trading.
DESVARIEUX: All right. Let’s pause the conversation there. In our next part we are going to see if we are going–if society is on the track to repeating the same mistakes, and what’s really going on in the markets right now. Thank you, gentlemen, for joining us.
WINSTON: Thank you.
BOWEN: Thank you.
DESVARIEUX: And thank you for joining us on the Real News Network.
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