If you are not yet mad enough about the bailout, allow me to recommend that you read Chain of Blame (Wiley, 308 pp.) by Paul Muolo and Mathew Padilla. In this book the authors describe in extensive detail a myriad of events and decisions, along with many of the central players, that have led to the current financial debacle whose size and impact is only now becoming clear. It's enough to get you angry.

Chain of Blame provides a "short history" of subprime lending that takes us as far back as the 1960s and the days of companies such as Beneficial Finance who made "small-balance consumer loans to millions of Americans." "Its business model was that it lent money to consumers who couldn't get loans from banks." In the 1960s Beneficial's average loan size was $370. Its originations totaled under $900 million. Business and profits grew as Beneficial made more 2nd trust deed loans, so that by the end of the '70s, the company held more than $4 billion in residential second liens on its books. Of course those were still in the old fashioned days when loan approval required that the borrower had both good credit and equity in the home.

In those days the subprime (though the word hadn't been invented yet) lenders such as Beneficial, The Money Store, and Aames Financial were still relatively small potatoes on the national scene. Their volume was limited by the nature of their funding sources -- primarily individual investors. Finally, though, the profit potential of these lending operations became clear to Wall Street. Prudential Securities provided Aames with a $90 million warehouse line (a line of credit to provide funds for mortgage originations). The deal included Prudential having the right to then purchase the mortgage loans, and to pool them into securitized mortgage bonds, which in turn were sold at a handsome profit. The infrastructure of the business had changed.

Not only did the underlying structure of the subprime mortgage business change, so also did its "face" (this was true for A loans as well). Prior to the Savings and Loan meltdown and the eventual demise of S&Ls, loan brokers played only a small role in the total picture of residential lending. But, as more and more non-bank lenders, such as Countrywide, expanded into the lending vacuum left by the S&Ls, independent loan brokers played an ever-increasing role. In the early 2000s, loan brokers were estimated to account for 60 to 70% of the residential loans originated in the country. And they were increasingly well-compensated for their efforts. A 2006 survey by National Mortgage News found that 25% of brokers surveyed earned between $200,000 and $400,000. Eight percent said they earned more.

The kinds of loans that were made changed too, helped along by the turn-of-the-century recession that had been fueled by the dot.com bubble bursting. The authors put it this way: "In the mortgage business, recessions are good for two things: refinancing booms and creating more subprime borrowers." Ameriquest Mortgage developed the perfect loan to meet the needs of the time (for borrowers) – the stated-income loan, later to become better known as "liar loans". Borrowers did not have to document their incomes; they only had to show decent credit scores and an acceptable (by various means) value to the property. "By 2003 Ameriquest and its various affiliates were originating $40 billion a year in mortgages across the nation -- 30 percent of them state-income or limited-documentation mortgages."

Of course it may be all well and good for mortgage originators to be comfortable funding dubious loans, but that effort is all for naught unless some entity will buy those loans. What could have induced Wall Street firms to buy them and what then could have influenced other purchasers to buy bonds that were securitized by those loans? Muolo and Padilla lay out the answers to both questions. They show how firms such as Merrill and Bear-Stearns were so "hungry for product" (that would then enable them to sell bonds backed by the "product") that they put inordinate pressure on secondary underwriting firms to find the loans acceptable. Secondly, they show how the bonds were able to receive investment-grade ratings, not by the worth of the underlying mortgage pools, but by the fact that the bonds were buttressed by insurance. Quoting an industry veteran, "Wall Street was into cranking out volume … . The Street would take out the worst credit pieces and overcollateralize them [with bond insurance]. They could get some of these up to 'AA' rating. It was like polishing a turd."

There is a slightly misleading aspect to the title Chain of Blame; for the book does not establish clear links from here to there. The muddy flow of the mortgage-related financing debacle is more like a river fed by many tributaries. No one is definitive of the outcome. Even without certain ones, the outcome might have been essentially the same. Long on biographical sketches of many of the central figures, nothing in the book singles out any one of them as the culprit or the cause. None is a sine qua non of the story, such that without his or her participation, it wouldn't have happened. If they hadn't done what they did, someone else would have. There are thousands like them. That is the scary part.

Published: November 3, 2008

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .