Last week in Cleveland, nine former employees of a former subprime lender named Argent Mortgage Co. were indicted for their roles in making nearly $13 million of fraudulent residential mortgage loans. The Cuyahoga County Mortgage Fraud Task Force, which brought the charges (it operates under authority from the Ohio attorney general) alleged, among other things, that managers at Argent coached brokers on how to falsify loan documents—say, by lying about the borrower's income—so that the borrower would appear to meet the company's standards. Cuyahoga County Prosecutor Bill Mason said that this was the first time in Ohio, and one of the few instances nationwide, that a mortgage fraud investigation led to criminal charges against the employees of a subprime lender. (Other cases have involved independent operators.)
In a way, this is great news: At least some of those who are to blame for the crime spree that was subprime lending are paying the price. But it's also an example of what's wrong with the fallout from the financial crisis. Those who are paying the price are the smallest of the small fry, while those who benefitted the most remain untouched. And in the case of Argent, it'll stay that way.
You may not have heard of Argent, and there's a reason for that. Argent's founder was a man named Roland Arnall, and Roland Arnall always stayed in the shadows. But he was the father of subprime lending. Within the industry, Argent was very well-known indeed.
Back in the late 1980s, Arnall founded a thrift called Long Beach Mortgage, which was at the vanguard of making mortgages to people with less than pristine credit. By the end of the 1990s, Long Beach had been sold to Washington Mutual, and many of the people who worked there had gone on to help build other major players on the subprime lending scene, such as New Century. After the sale of Long Beach, Arnall founded another lender called Ameriquest, which by 2004 was the nation's largest subprime lender. ("Proud sponsor of the American dream" was the company's tag line.) Argent was a lesser-known division of Arnall's empire. Unlike Ameriquest, whose loan officers made mortgages directly, Argent was a so-called "wholesale" lender, meaning that it bought loans from mortgage brokers. (By 2001, 50 percent of mortgages were being made through independent brokers, who sold to wholesalers like Argent.) But Arnall's name was never on the door of any of his companies, and none of them sold shares to the public. You never read about Roland Arnall in a glossy magazine; he was very private.
Early on, Argent began pushing subprime loans in Cleveland. Indeed, a lawsuit filed by the city of Cleveland in 2008 against a number of subprime lenders and Wall Street firms alleged that Argent accounted for more than one-quarter of all the subprime loans made in Cleveland from 2002 to 2006. (The lawsuit was later dismissed.) "When Argent showed up, they immediately jumped out because of the volume of their activity," Tom Bier, a housing expert at Cleveland State University, who has been analyzing county records for 25 years, told me. "They went after the weakest fish." According to Bier's analysis, by April 2007, 25 percent of the loans that Argent made in Cleveland had resulted in foreclosures. So it was that Cleveland, where home prices never rose high enough to mask the problems with the mortgages, became a bellwether of the problems to come.
Within the industry, Arnall's companies developed a reputation for the hard sell, and for making any loan at any price. As in most of the industry, everyone was compensated based on loan volume, so in the branches, all that mattered was selling as many loans as possible, by any means necessary. "Push, push, push," one former loan officer told me. Managers were brutal to those who weren't closing loans, and it was an open secret that there were ways to get around the company's supposed controls.
The business made Roland Arnall a very wealthy man. In 2002, Roland and his second wife, Dawn, bought Engelbert Humperdinck's $30 million, 10-acre compound in Holmby Hills, Calif. Two years later, they bought the second-most-expensive home in America, a 650-acre ranch in Aspen, Colo., with a 15,000 square-foot house that had been owned by Peter Guber, for which Arnall paid $46 million. By 2004, Roland Arnall made the Forbes 400 list with a net worth of $2 billion; in 2005, he was No. 73, with a net worth of $3 billion.
In the summer of 2004, a group of state attorneys general began investigating Ameriquest. (The AGs had limited power over Argent because it didn't make its loans directly to consumers.) On Jan. 23, 2006, the AGs announced that Ameriquest had agreed to pay $325 million to settle allegations from 49 states that it had engaged in extensive consumer abuse. (Ameriquest didn't do business in Virginia because it requires extensive financial disclosure by the main shareholder of any company doing business there, something Arnall refused to provide.) But neither the news of the investigation nor a scathing expose of Ameriquest that ran in the Los Angeles Times in early 2005 had deterred President George W. Bush from nominating Arnall, who along with Dawn had raised more than $12 million for GOP causes and candidates between 2004 and 2008, according to the Times, to be the ambassador to the Netherlands. A month after the settlement was announced, Arnall was confirmed. Press reports at the time said that the payment "cleared the way" for Arnall's confirmation.
In 2007, what was left of Arnall's companies was sold to Citigroup. The following spring, Arnall died abruptly: He had been suffering from esophageal cancer that had metastasized. Later that year, the Office of the Comptroller of the Currency put together a document called "Worst Ten in the Worst Ten." It listed the 10 worst lenders in the 10 metropolitan areas with the highest rates of foreclosure. (The survey was based on the level of foreclosures for subprime and Alt A loans originated from 2005 to 2007.) Argent made the top 10 in all 10 cities and was No. 1 in Cleveland and Detroit. Long Beach Mortgage, which also featured prominently on the list, played a big role in the demise of Washington Mutual. Arnall's death at 68, while untimely and a terrible blow to those who loved him, enabled him to complete his life with his reputation relatively unscratched.
So here we are in 2011. Roland Arnall is, of course, beyond the reach of the law. While the Cuyahoga County Mortgage Fraud Task Force wants to follow the old prosecutor's mandate of "start at the bottom"—get the junior people to rat out more senior people, and so on— it's not clear that they'll be able to reach any higher into Argent. Indeed, the indictment says that fraud was committed "without the knowledge of Argent." After all, prosecutors can't say that Argent encouraged the behavior without also going after someone more senior at Argent. And in truth, it's unlikely that anyone senior at Argent specifically encouraged the individual acts of fraud. Rather, the executives at Arnall's companies created a culture in which the junior people were rewarded for getting the loans made by any means possible while everyone else looked the other way. And there's no statute under which executives can be prosecuted for creating a culture in which criminality is encouraged. Even had Arnall lived, prosecutors probably would have had a hard time making a legal case against him
Argent and Arnall may be an extreme version of what's happened in the wake of the crisis, but similar scenarios have been played out everywhere. A young salesman at Goldman Sachs, Fabrice Tourre, is the only individual who is facing charges from Goldman's notorious Abacus transaction. Last week, the Securities and Exchange Commission announced a settlement with JPMorgan over the sale of securities tied to the housing market. A man named Edward Steffelin, who headed the team at the outside firm that managed the portfolio of securities, was also charged. Is it really Tourre and Steffelin alone who created the structure of these transactions and the culture in which such deals were routinely done, and who benefitted the most from it? Give me a break!