Join the Fool as we assess blame for this financial meltdown -- March Madness bracket style! Below is one of eight first matchups you can vote on … enjoy!
The case for Mozilo and Killinger, by Jim Mueller
Mortgage-backed securities. Credit freeze. Rising foreclosure levels. Layoffs at companies like Boeing (NYSE: BA ) . Our headlines are full of cheerful news like this. While there is plenty of blame to go around, two people in particular made significant contributions to the debacle.
The dual monarchs of the housing bubble
Angelo Mozilo, former CEO of Countrywide Financial before Bank of America (NYSE: BAC ) bought the company, certainly made out like a bandit. Not only did he sell tens of millions of dollars of stock before the share price plummeted, but he even bullied Countrywide into reimbursing him on taxes owed for his wife's use of the corporate jet. All while selling mortgages to just about anybody with a pulse.
And then there's Kerry Killinger, who took home more than $88 million during his last seven years as CEO of Washington Mutual. He oversaw the conversion of that staid, conservative savings and loan into an aggressive mortgage-dealing machine. And the machine cranked out mortgages under the imperative of more and more profits, until the leverage such demand required turned on its wielder and destroyed it. The pieces were later absorbed by JPMorgan Chase (NYSE: JPM ) .
Yes, yes, the math-heads and their models of ever-rising home prices contributed to the whole mess by making mortgage-backed securities seem like a sure thing. But where do you think they got that basic assumption in the first place? It certainly wasn't from Calculus 101. No, they got it from the mortgage brokers overseen by the likes of Mozilo and Killinger. Buy a house, wait six months, flip it for a profit. Rinse and repeat. The price always goes up, so have another mortgage! All driven by the engines of companies like Washington Mutual and Countrywide.
Mozilo has said, "I've spent my life trying to lower the barriers of entry for Americans to own homes." Well, he and Killinger succeeded beyond their wildest dreams. And now we must clean up the mess.
The case for geeks bearing formulas, by Alex Dumortier, CFA
Who is more to blame for the current crisis: big mortgage-bank CEOs like Killinger and Mozilo, or the model-building geeks in finance who made it possible for their banks to do the damage they did? For me, this one's easy to call: It's sort of like putting North Carolina up against a team of community college walk-ons.
I won't reinvent the wheel to demonstrate that so-called "quants" -- holders of advanced degrees in science or engineering that flooded the financial services industry in the 1990s and 2000s -- bear the ultimate responsibility in the current crisis.
Listen to the Oracle …
Instead, let me refer you to someone with a panoramic understanding of business and finance. In his latest annual letter to Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) shareholders, Warren Buffett shared his view on the matter:
Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors … Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.
My esteemed opponent has tried to argue that the dastardly duo of Killinger and Mozilo share a greater portion of the blame. But those two men are no match for legions of geeks: the former duo just happened to ride the bubble, while the latter group laid its very foundations.
What if WaMu and Countrywide had never existed?
If Killinger and Mozilo were more instrumental in this crisis than the geeks, that would imply that the crisis would never have happened without WaMu or Countrywide.
But who's naive enough to believe that? How would one then explain Bear Stearns, Lehman Brothers, AIG (NYSE: AIG ) , Fannie Mae (NYSE: FNM ) , Freddie Mac, or any of the host of banks that are currently having troubles? It should be clear that had Countrywide or WaMu never existed, there would have been plenty of firms lined up to fill the vacuum.
This is the easiest decision you're going to make all week: Vote for the geeks!
Now it's your turn. Who do you think is more responsible for the mortgage mess: the back-room mechanics who gave banks the tools to wreak havoc on the world's financial system, or the top-floor executives who actually used them? Make your pick below.
Check out the Fool’s entire 2009 March Madness bracket here.
Take the Motley Poll
Who's more to blame for the financial crisis?