All The Devils Are Here: Unmasking the Men Who Bankrupted the World (40 page)

But that would only emerge much later. Over the course of the next year, as the subprime bubble peaked and then began to crack, Cassano, Forster, and Park all truly believed they had dodged a bullet.

F
rom the early days of subprime lending, there was a small, lonely group who sided with the consumer advocates fighting the subprime companies: the attorneys general in a handful of states like Iowa, Minnesota, Washington, and Illinois. They, too, had heard borrowers’ complaints firsthand, and saw the havoc that subprime lending was wreaking on communities. Some of them also understood that this wasn’t just about the borrowers. “It’s not in anyone’s long-term interest for consumers to get loans they can’t pay back,” says Prentiss Cox, the former attorney with the Minnesota attorney general’s office. “It’s only in the short-term interest of those who are raking in fees.” On a conference call with several other AGs in 2005, he said bluntly, “This whole thing is going to collapse.”

This alliance of attorneys general had investigated First Alliance (aka FAMCO) and then struck a landmark $484 million settlement with Household Finance in 2002. “I first heard about FAMCO when someone walked into my office with a complaint from a consumer that he had paid 20 percent of the loan amount in fees,” says Cox. “I said, ‘That’s a typo. Call ’em back.’ ” It wasn’t a typo. Cox’s second big wake-up call came after the Household settlement. “We thought we had done a big thing,” he says. “We thought we had solved the problem of predatory lending. Stupid us. Immediately after we did this, the industry tripled.”

By 2004, the AGs were targeting another lender, one that Cox called the “prototype” of the new breed of subprime lenders. Its loan volume was enormous. “We had these spreadsheets showing all the loans,” Cox says. He recalls thinking to himself, “Oh my God. The scope of their lending is unbelievable.” The company was Roland Arnall’s Ameriquest.

That summer, Cox first started hearing complaints from consumers that
Ameriquest had inflated the value of their homes, qualifying them for loans they couldn’t afford. In fact, all over the country, complaints were flooding in that Ameriquest had not only inflated appraisals, but had encouraged customers to lie about their income or their employment and had misled borrowers about the fees embedded in their loans. They had promised people they’d be able to refinance out of expensive loans without disclosing that Ameriquest had stuck on hefty prepayment penalties if they did so. And on and on.

By then, Cox knew not to expect help from federal regulators. He started calling the OCC the “Office of Corporate Counsel” for the banking industry. The Fed, he says, viewed the AGs as “mosquitoes.” After all, those smart bankers on Wall Street wouldn’t securitize subprime loans if they were that terrible—would they? “Who do you trust?” Cox says. “A bunch of stupid public service lawyers who mostly aren’t even making six figures, or the people on Wall Street who are making eight or nine figures? It was an easy answer for the Fed.” He adds, “The regulators were totally uninterested in looking on the ground at what was happening to actual human beings. We were the only cops on the beat. And we were the people with the smallest hammer.”

In August of 2004, a group of Ameriquest executives, including general counsel Tom Noto, flew to Iowa to meet with Iowa attorney general Tom Miller and several others. The Ameriquest executives were cooperative. Their response to the complaints was consistent: “We don’t do that”; “That’s not the kind of company we are.” When faced with a particularly ugly loan, they’d say, “That’s an outlier.” How could that be, the AGs wondered, when the horror stories were so uniform—and came from all over the country? “I think they were clever,” says one participant. “This was a clever company led by an exceedingly clever man. I mean clever in the sense of shrewd, street smart.”

In early 2005, as the negotiations were getting under way, the
Los Angeles Times
published a scathing exposé of Ameriquest. The headline read “Workers Say Lender Ran ‘Boiler Rooms.’ ” Among other things, the story noted that lawsuits filed by consumers in California and at least twenty other states “allege a pattern of fraud.” One person who read the article was Robert Gnaizda, the general counsel of the Greenlining Institute. Over the years, Gnaizda had become friendly with Arnall, seduced by his charm and his seemingly sincere commitment to good lending practices. “He said they were trying to be the best subprime lender in the country, and I thought, ‘This guy could do it,’ ” Gnaizda recalls. His nonprofit had taken grants from Arnall
for affordable housing and was in discussions with Arnall about an additional $1.5 million grant.

When the
Times
’s expose was published, Gnaizda called Arnall. One of Arnall’s executives called him back and told him the story was all wrong. “I said, ‘This is too disturbing,’ ” says Gnaizda. “I need a written refutation, or I’m out.” He also insisted that Arnall call for an independent investigation of the allegations. Arnall refused. Gnaizda sent back a $100,000 check that Greenlining had received from Ameriquest. “I was told that Roland was infuriated.” He adds, “I got to know Arnall very well, I got to like him, and then I was very disappointed by him, to put it mildly.”

As the negotiations with the AGs heated up, several state attorneys general and their aides flew out to Orange County for a meeting at Ameriquest’s headquarters. Arnall, who was not part of the negotiating team, asked Iowa’s Tom Miller and Arizona attorney general Terry Goddard to come to his office. “We’ve got a few bad apples, and we didn’t deal with it quickly enough,” Arnall told them. Miller quickly disagreed. “The problems are pervasive,” he said. Later that night, about a dozen people from both sides—“It was like the Arab-Israeli peace accords!” jokes Cox—went out to dinner at a restaurant in Anaheim. During the dinner, Arnall stood up and said, “I’m embarrassed that you all had to come out here. I’m ashamed.”

“I started thinking, well, just a few hours ago you were saying this was just a few bad apples,” recalls Miller. “When that didn’t work, you changed direction.”

Cox, for his part, was seething. After the dinner, he sent $50 to Ameriquest to reimburse them for his meal. Ameriquest told him that the cost was actually $98 per person. He forked over the remaining $48 with a note that said, next time, his treat—at a fast-food restaurant.

On January 23, 2006, the AGs announced that Ameriquest had agreed to pay $325 million to settle allegations from forty-nine states that it had engaged in extensive consumer abuse. (Ameriquest didn’t operate in Virginia because the state requires detailed financial disclosure by the main shareholder of any company doing business there, which Arnall refused to provide.) Ameriquest denied all the allegations but agreed to make major changes in its business, including changing how appraisals were handled, eliminating incentives to sales personnel to include prepayment penalties or any other fees, and charging the same interest rates and discount points to customers with similar credit profiles. It also set up a fund to make restitution to customers who could show they had been ripped off by the company. Most of the AGs were
happy; they felt this established a model that the rest of the industry would have to follow. Indeed, after the settlement, New Century wrote in its annual report that if it had to follow the guidelines Ameriquest had agreed to, “some of our practices could be called into question and our revenues, business, results of operations and profitability could be harmed.” Which, in effect, was an admission that the entire industry had been built on a foundation of fraud.

As if to prove the point, Ameriquest never really recovered from the settlement. “Corporate is making a big push now to clean up its dirty image because of the heat coming down (they even took the Red Bull machines out of the offices),” wrote one employee on the consumer Web site Ripoff Report in the spring of 2005. (This employee added, “Good luck to everyone who is fighting this devil of a company. You will need it.”) A few months later, on the same site, someone who called himself Eric and said he was an Ameriquest executive wrote, “We will not come out stronger, the company will be better, cleaner, and less profitable…. The glory days are over in this company, so pack up your glory and head elsewhere.”

In May, less than five months after the settlement was struck, Ameriquest announced that it was closing all 229 retail branches and eliminating 3,800 jobs, and would henceforth operate through four large regional call centers. “It seemed kind of heartless because they made such a big deal out of team, family, and then, all of a sudden—boom,” says one employee who was laid off. “The way it was done was especially impersonal.” Each department was called into a conference room to hear the news via a conference call—which wasn’t even live, but rather a tape loop that played over and over again. At headquarters, the mood was bleak. “Once the AGs really starting digging around, and more information became available to employees, that’s when people really began to question who we were and what we were doing as an organization,” says a former executive.

Aseem Mital, a veteran of Ameriquest’s parent company, ACC, became CEO in June. Mital insisted that Ameriquest could still succeed with its new model, and that growth would be steady. But it turned out “Eric” was right, either because Ameriquest couldn’t operate profitably under its agreement with the AGs or because it couldn’t operate at all. For instance, an appraiser Ameriquest hired to help clean up its practices discovered that in New York the company’s loan officers were paying huge sums to a group of appraisers—all of whom worked for the same outside firm—and these appraisers
were consistently valuing the homes at 100 percent of the value that the loan officers had assigned the properties. (Inflated appraisals were one of the most common forms of fraud during the housing bubble.) Upon further digging, he discovered that the owner of the outside firm was the wife of one of Ameriquest’s employees. And while Ameriquest was supposed to install a new system that ferreted out appraisal fraud in its four new call centers, this person says that the company made a decision not to install it in its Sacramento office.

By late 2006 Ameriquest was searching for a buyer, and by early 2007 ACC was running low on cash. Then came a revealing moment, one that gave a glimpse into just how clever Roland Arnall could be. In 2004, he had invited Deval Patrick—the same Deval Patrick who had led that early Justice Department investigation into the lending practices at Long Beach—to join ACC’s board. Patrick was paid $360,000 a year. He resigned from the board two years later to run for governor of Massachusetts, and he won. In March 2007, as ACC was flailing, Governor Patrick made a call on behalf of Arnall. According to the
Boston Globe
, he phoned Robert Rubin, who was then the vice chairman of Citigroup and someone Patrick knew from the Clinton administration. A week after the call, Citigroup agreed to put fresh working capital into ACC. Arnall also contributed some of his personal wealth to keep the company going.

By the fall of 2008, Ameriquest had been shut down; Citigroup took over the $45 billion portfolio of loans that needed to be serviced from ACC’s Argent division. Patrick later apologized for making the call, acknowledging that “financial exploitation of the poor, elderly, and minorities [was] pervasive at Ameriquest.” But that call, as it turned out, wasn’t the only favor he did for Arnall.

In 2008, the OCC put together a document called “Worst Ten in the Worst Ten.” It listed the ten worst lenders in the ten metropolitan areas with the highest rates of foreclosure. The document vividly displayed the havoc that Arnall’s companies were wreaking on the American landscape. There were a total of twenty-one companies on the ten lists. Arnall’s Argent made the top ten in all ten cities, and was number one in Cleveland and Detroit. Long Beach made nine of the ten lists, landing the top spot in Sacramento, Stockton, Memphis, and Denver. And Ameriquest made seven of the ten lists, despite having slowed down its lending significantly since the settlement with the state attorneys general. (ACC says that it is “unfair and
inaccurate to tie” Long Beach to Arnall’s other companies, given that ACC had severed its links to Long Beach more than a decade before the OCC’s report.)

And yet, at the time, it was as if the Ameriquest investigation and settlement had happened in a parallel universe. In the spring of 2005, after the
Los Angeles Times
exposé had been published but before the big AG settlement, President Bush nominated Arnall to be the U.S. ambassador to the Netherlands. Maybe this shouldn’t have been a surprise—according to the
Los Angeles Times
, between 2004 and 2008 Arnall and his wife, Dawn, raised and gave more than $12 million to GOP causes and candidates. The donations included $5 million from Dawn to the Progress for America Voter Fund, which shared some donors with the Swift Boat ads that helped bring down the 2004 Democratic presidential candidate, John Kerry. Shortly after winning reelection, Bush announced the appointment of the Arnalls as honorary cochairs of the inaugural fund-raising committee. That wasn’t really a surprise either: As
USA Today
wrote, “Inaugural fundraisers Dawn and Roland Arnall found a creative way to pump more than the $250,000 limit into the event. Their mortgage firm, Ameriquest Capital, contributed the maximum, as did three subsidiaries, for a total of $1 million.” Arnall said that he supported Bush’s stance on Israel, but few believed that was the only explanation. “Many of his philanthropic pursuits and major marketing campaigns were designed to generate the greatest political influence,” says a former executive.

Arnall’s confirmation hearing took place in November 2005. His wife and his brother Claude sat proudly in the audience. Tom Lantos, a Holocaust survivor and a Democratic congressman from California who Arnall had long supported, introduced him. “I strongly believe, Mr. Chairman, that Roland is one of the great anonymous philanthropists of our time,” said Lantos. Norm Coleman, the Republican senator from Minnesota, called Arnall a “friend,” and said, “I’m particularly proud of Mr. Arnall’s achievements.” Senator George Allen, the Republican from Virginia, noted that the governor of Mississippi, Haley Barbour, had sent a thank-you note for Arnall’s generosity in the wake of Hurricane Katrina, and he pointed out that letters supporting Arnall had arrived from the speaker of the California State Assembly, the governor of Pennsylvania, and the mayor of Los Angeles. Not surprisingly, Ameriquest—or Dawn Arnall personally—had given generous political contributions to all three.