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Who's More to Blame: Mortgage Banking CEOs or Geeks Bearing Formulas?

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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!

Vote now!
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.

Alex Dumortier, CFA, doesn't own shares of any of the companies mentioned in this article, while Jim Mueller owns shares of Berkshire Hathaway. The Fool owns shares of Berkshire Hathaway, which is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor selection. JPMorgan Chase is a former Motley Fool Income Investor pick. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2009, at 12:49 PM, madmilker wrote:

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

    quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

    People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

    Think of America first and help your neighbor keep their job. Cheap item from foreign lands cost all taxpayer over $9 billion in hidden taxes jus to clean fish from the ballast tanks of ships.

    Keep your currency at home working for you….not stuck in a foreign.

  • Report this Comment On March 17, 2009, at 1:20 PM, MrZ2357 wrote:

    How about 2 more candidates for the vote:

    1 The American public who took those loans.

    2. Congress who mandated that Freddi and Fanny accept riskier loans encouraging institutions to produce them.

    I don't buy the argument that the American public were duped into accepting these loans. I believe for the most part that they new that they could not afford the loans and were making a leveraged bet that housing prices would go up.

    In a lot of cases they lied about their income to secure the loan. I believe they call this "Stated income".

    Before this administration nationalizes everything by blaming the most convenient participants in this post bubble crash, we need to focus on other culprits of this debacle. Congress and the American public.

    Look I don't blame my broker for any margin calls due to my bad investments. So quit putting all the blaim on the financial institutions. If there was no appetite for these instruments, they would not exist.

  • Report this Comment On March 17, 2009, at 2:16 PM, KWT8011 wrote:

    I'm a little surprised the geeks are winning this poll.

    Re: The American Consumer:

    I would agree that maybe they weren't duped into signing a bad product, but at best they were probably ill informed about the risks of taking such a loan.

    I think the average person has a hard time understanding amortization, compound interest, the effect of a change in rate of 1%, etc. And when people selling mortgage products only cared about closing ASAP, it doesn't behoove them to allow ample time for consideration.

    I don't think people were duped simply because there was an opportunity for them to analyze loans, but I do believe people were given a hard sell on the idea that low rates and refinancing will be around forever, houses never lose value, and your ARM payment is lower than a 30 yr fix so it's the right product.

  • Report this Comment On March 17, 2009, at 6:18 PM, ibropin wrote:

    no no no cant be me they pushed me to get that loan I had no idea what 1% would do to my payment . I bought homes long before I knew what amortization even meant ,but I did know what I could pay for and I made the choices .

  • Report this Comment On March 17, 2009, at 10:04 PM, drgora wrote:

    There's plenty of blame to go around but the biggest share by far escaped your attention entirely. Congress, especially the Democrats led by Barney Frank, Chris Dodd, Charles Schumer and the Congressional Black Caucus were chiefly responsible for the conversion of Fannie Mae and Freddie Mac into de facto welfare agencies. Fannie and Freddie then created the mountains of toxic mortgages which subsequently trainwrecked the financial system. In his recent annual letter Buffett alluded to Congress' pivotal role in this matter but failed to name names or parties. Your poll misdirects the readers in their search for the truth.

  • Report this Comment On March 18, 2009, at 2:14 PM, ziq wrote:

    Blaming the geeks bearing formulas is exactly like blaming Einstein for the destruction of Hiroshima because he wrote E=mc^2. In both cases, it's surprising how many people do.

  • Report this Comment On March 18, 2009, at 8:47 PM, Guthree wrote:

    This one was too close to call for me.

    About Fannie and Freddie and the American Public, they are both in this tournament. There are sixteen choices. Look in the other brackets.

    I would say that it would be more like blaming Einstein for a bad result if he'd written E=mc^5 or something.

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