The SF Chronicle’s prescient mortgage conspiracy theorizing

By Felix Salmon
June 1, 2011

Back in December 2007, before Bear Stearns went bust but just as the country was tipping into recession, a California lawyer named Sean Olender was worrying about the putbackpocalypse — the idea that holders of mortgage-backed bonds would force banks to buy them back at par, thereby wiping out the capital in the banking system. To his credit, Olender was one of the first people to latch onto this worry, which still hasn’t gone away.

But Olender went much further than worrying about putbacks; he was also convinced that there was a conspiracy afoot to prevent them from ever happening. The idea — which he outlined in an op-ed article on the front page of the C section of the San Francisco Chronicle — was, essentially, that Hank Paulson knew all about fraud in the mortgage origination process from his time as CEO of Goldman Sachs. And that therefore he knew all about putback risk. And that therefore he was deathly worried about putback risk. And that therefore when Paulson proposed that subprime adjustable-rate mortgages be frozen at their “teaser” rates for five years, what he was really doing was trying to put into place a cunning plan which would prevent any putbacks.

With hindsight, this credits Paulson with far too much prescience. As we now know, Paulson was taken by surprise by the events of September 2008, and wasn’t remotely prepared for what happened, responding in a panicked and ad hoc manner. His long-forgotten mortgage-freeze proposal was just a mortgage-freeze proposal: it wasn’t an attempt to prevent putbacks, largely because there’s no real reason to believe that a frozen mortgage would be harder to put back to the originator than an unfrozen mortgage.

Olender, by contrast, painted Paulson as a criminal fraudster, taking advantage of his position at Treasury to avoid lawsuits and even prison. I was not impressed, and responded by calling his column “incendiary and meretricious”.

With the benefit of hindsight, I went too far in my post. I said that there was nothing to Olender’s accusations of fraud, when in fact there was a lot of fraud in the mortgage-origination process, even if there wasn’t a criminal conspiracy reaching up to the Treasury secretary to cover it up.

I’m pretty sure I was right about our fundamental disagreement: the mortgage freeze proposal was not a fraud, it was just a well-intentioned attempt (which failed) to freeze mortgage rates. (If it had been driven by bank fears of putbacks, you would think the banks would have embraced the proposal, rather than successfully shooting it down.)

But I did attack Olender personally — I called his piece “grossly irresponsible”, and lumped him in with “nutcases” who are “rather out to lunch”, including Ben Stein. All of which has prompted Martha Hamilton to declare that I owe Olender an apology.

Hamilton didn’t talk to me before writing her piece, and I’m pretty sure she didn’t talk to Olender either. So she spends a lot of time on what I think is a side issue here — the culpability of the investment banks in the mortgage crisis. Yes, they deserve prosecution, as Carl Levin and others have shown. But I never said they were white as snow; I just said that they were generally not at risk of having bonds put back to them, if they didn’t originate those bonds. The banks did buy a handful of subprime mortgage originators, but most subprime loans were originated by independent shops, at least until Countrywide got bought by Bank of America — something which happened long after Olender’s column was published. Again, if the banks were very scared of putbacks, BofA would never have made that acquisition.

And Hamilton’s simply wrong about this:

I remember, in the early days of blogging, questions raised about how far journalists could go in this different form of writing. There was pressure to be over the top, to be outrageous, to turn yourself into an attitude-propelled superbrand. And some journalists went too far, as I think Salmon did here.

I was hired, a few months before this post was written (but still, long after “the early days of blogging”), to be the finance blogger for a brand-new and meticulously fact-checked glossy monthly called Condé Nast Portfolio. I can assure Hamilton that never once was there any pressure at all to be over the top, to be outrageous, or for me to to turn myself into an attitude-propelled superbrand. Quite the opposite: all the tensions I had with my editors were a function of me having too much attitude, rather than too little, especially when the subject of my tirades was an article in Condé Nast Portfolio itself.

Insofar as there was attitude and outrage in this piece, it was simply me, saying what I thought of Olender’s piece in one of my many siwoti moments. Yes, I was shrill, and I make no apologies for that. Hamilton reckons I “would have benefited from an editor who might have helped me walk it back”, as though shrillness is a bad thing, in blogging; in fact, it’s one of the things which makes blogs compelling and readable in contrast to long and dutiful pieces of classical journalism.

But still, I was directionally wrong in December of 2007, and Olender was directionally right. Because Olender was ascribing so much bad faith to so many players in the market, up to and including the secretary of the Treasury, I missed an important point about the degree to which the whole mortgage-bond edifice had been built on fraudulent foundations. And in missing that point, I found it far too easy to dismiss everything that Olender had to say on the grounds that some of it was clearly going too far. Having done that, I just piled on, making my share of bad points along with my good ones.

In the normal course of things, my post would be long forgotten today, just one of ten different blog entries I posted on December 11, 2007. Certainly I would have forgotten it. But then there’s the matter of Google: my post remains stubbornly high in the Google search results for anybody looking up Olender’s name.

Olender is upset about that, and has periodically sent me dyspeptic emails asking for an apology in between calling me “such an idiot”, or “the foppish Felix”, or a “pompous Metrosexual” lacking “moral sensibilities” who hasn’t “been adequately trained as a journalist”. Since he was pretty much right about all that, I forwarded his latest email on to CJR for a third-party verdict, and that’s why Hamilton’s weighing in now, with her verdict that I owe Olender an apology.

So: well done, Sean, for being very early to the problem of putbacks. You were much more right than I gave you any credit for, or than I thought possible at the time, and you certainly didn’t deserve to be lumped in with Ben Stein. Sorry.


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“Yes, I was shrill, and I make no apologies for that.”

Why not?

Posted by RJonsson | Report as abusive

“I just said that they were generally not at risk of having bonds put back to them, if they didn’t originate those bonds.”

Well, actually, that’s not so clear. I’ve only looked closely at the structure of one MBS, but in that case the transfer from the orginator to the sponsor to the depositor to the trust were all via assignment — with the result that every party in the chain could have the legal obligation to buy back the loan (for example, if it was originated in violation of a law). While the obligations of the sponsor and the depositor may be more limited than those of the originator, they are not necessarily non-existent.

Posted by csissoko | Report as abusive

Ack! You compared him to Ben Stein? TCH… nasty!

Oooh you may have to do better than that when the SHTF, because the problem is still there, big blobs of it are still in the air and have to land somewhere.

Posted by hsvkitty | Report as abusive