Feature, The Audit May / June 2012

The reporter who saw it coming

Mike Hudson thought he was merely exposing injustice, but he also was unearthing the roots of a global financial meltdown
By Dean Starkman

M ik e H udson began r epor ting on the subpr ime mor tgage business in the ear ly 1990s w hen it w as still a mar ginal, if ethically challenged, business. H is w or k on the pover ty industr y (paw nshops, r ent-to-ow n oper ator s, check-cashing oper ations) led him to w hat w er e then know n as second-lien mor tgages. Fr om his str eet-level per spective, he could see the abuses and asymmetr ies of the mar ket in a w ay that the conventional business pr ess could not. But because it r an mostly in small publications, his r epor ting w as lar gely ignor ed. H udson pur sued the stor y nationally, via a muckr aking book, M erchants of M isery (Common Cour age Pr ess, 1996); in a 10,000-w or d expose on Citigr oup-as-subpr ime-factor y, w hich w on a Polk aw ar d in 2004 for the small alter native magazine Souther n Exposur e; and in a ser ies on the subpr ime leader , Amer iquest, co-w r itten as a fr eelancer , for the Los Angeles Times in 2005. H e continued to pur sue the subject as it metastasized into the tr illion-dollar

center of the Financial Cr isis of 2008br iefly at The Wall Str eet Jour nal and now at the Center for Public I ntegr ity. H udson, 5250, is the son of an ex-M ar ine and legendar y local basketball coach. H e star ted out on r ur al w eeklies, cover ing championship tomatoes and lar ge fish and such, even pr oduced a cooking column. But as a r epor ter for The Roanoke Times he tur ned to muckr aking and never looked back. CJRs D ea n St a r k m a n inter view ed H udson in the spr ing of 2011. Follow the ex-em ployees The gr eat thing about The Roanoke Times was that ther e was an emphasis on investigation but ther e was also an em phasis on stor ytelling and wr iting. And they would br ing in lots of people like Roy Peter Clar k and William Zinsser , the On Wr iting Well guy. The Pr ovidence Jour nal book, the H ow I Wr ote the Stor y, was a bit of a Bible for me. As I was doing a ser ies on pover ty in Roanoke, one of the local legal aid attor neys was like, I ts not just the lack of moneyits also what happens when they tr y to get out of pover ty. H e said basically ther e ar e thr ee ways out: they bought a house, so they got some equity; they bought a car so they could get some mobility; or they went back to school to get a better job. And in ever y case, he had example after example of folks, who because they wer e doing just that, had actually gotten deeper in pover ty, tr apped in unbelievable debt. H is clients often dealt with for -pr ofit tr ade schools, tr uck driving schools that would close down; medical assistants schools that no one hir ed fr om; and again and again theyd be thr ee, four , five, eight thousand dollar s in debt, and unable to r epay it, and then of course prevented fr om ever again going back to school because they couldnt get another a student loan. So that got me thinking about what I came to know as the pover ty industr y. I applied for an Alicia Patter son Fellowship and proposed doing stor ies on check-cashing outlets, pawn shops, second-mor tgage lender s (they didnt call themselves subpr ime in those days). This was 91. We didnt have access to the I nternet, but I came acr oss a wir e story about something called the Boston second-mor tgage scandal, and got somebody to send me a thick stack of clips. I t was r eally impr essive. The Boston Globe and other news or ganizations wer e taking on the lender s and the m or tgage br okers, and the closing attor neys, and on and on. I was tr ying to make the stor y not just local but national. I had some local cases involving Associates [ Fir st Capital Cor p., then a unit of For d M otor Corp.] . Basically, it tur ned out that Ford M otor Company, the old-line carmaker , was the biggest subpr ime lender in the countr y. The evidence was pretty clear that they wer e doing many of the same kinds of bait-and-switch salesmanship and, in some cases, pur e fr aud, that we later saw take over the mor tgage mar ket. I felt like this was a big stor y; this is the one! Later, investigations and Congr essional hear ings cor r obor ated what I was finding in 94, 95, and 96. And it seems so self-evident now, but I lear ned that finding ex-employees often gives you a window into whats r eally going on with a company. The pr oblem has always been finding them and getting them to talk. I spent the better par t of the 90s writing about the pover ty industry and about predator y lending. As a repor ter you dont want to be defined by one subject. So I was actually wor king on a book about the history of r acial integr ation in spor ts, inter viewing old Negr o-league baseball player s. I was r eally tr ying to change a little bit of how I was moving for war d car eer -wise. But its like the old mafia-movie line: ever y time I think I m out, they pull me back in. Subpr im e goes m ain str eam

I n the fall of 2002, the Feder al Trade Comm ission announced a big settlement with Citigroup, which had bought Associates, and at fir st I saw it as a positive development, like they had nailed the big bad actor . I m doing a 1,000-wor d fr eelance thing, but of course as I star ted to r epor t I star ted hear ing fr om people who wer e saying that this settlement is basically giving them absolution, and allowed them to move forwar d with what was, by Citi standar ds, a pr etty modest settlement. And the other thing that str uck me was the media was tr eating this as though Citigr oup was cleaning up this legacy pr oblem, when Citi itself had its own pr oblems. Ther e had been a big magazine stor y about [ Citigr oup Chief Sanford I .] Sandy Weill. I t was like Sandys Comeback. I saw this and said, Whoa, this is an example of the mainstr eaming of subpr ime. I pitched a story about how these settlements werent what they seemed, and got tur ned down a lot of places. Eventually I went to Souther n Exposur e and called the editor ther e, Gar y Ashwill, and he said, Thats a gr eat stor y, well put it on the cover . And I said, Well how much space can we have? and he said, H ow much do we need? That was not something you hear d in jour nalism in those days. I inter viewed 150 people, mostly bor r ower s, attor neys, exper ts, industr y people, but the stuff that r eally moves the story are the for mer employees. M any of them had just gotten fir ed for complaining inter nally. They wer e upset about what had gone onto some degr ee about how the company treated them, but usually ver y upset about how the company had pr essur ed them and their co-wor ker s to mistr eat their customer s. As a r esult of the Citigr oup stuff, I got a call fr om a filmmaker [ James Scur lock] who was working on what eventually became M axed Out, about cr edit car ds and student loans and all that kind of stuff. And he asked if I could go visit, and in some cases r evisit, some of the people I had inter viewed and he would follow me with a camer a. So I did sessions in r ur al M ississippi, Br ooklyn and Queens, and Pittsbur g. Again and again you would hear people talk about these bad loans they got. But also about str ess. I r emem ber a guy in Brooklyn, not too far fr om wher e I live now, who paused and said something along the lines of: You know I m not pr oud of this, but I have to say I r eally consider ed killing myself. Again and again people talked about how bad they felt about having gotten into these situations. I t was power ful and eye-opening. They didnt under stand, in many cases, that theyd been taken in by ver y skillful salesmen who manipulated them into taking out loans that wer e bad for them. I f one per son tells you that story, you say okay, well maybe its tr ue, but you dont know. But youve got a woman in San Fr ancisco saying, I was lied to and heres how they lied to m e, and then youve got a loan officer for the same company in subur ban Kansas saying, This is what we did to people. And then you have another loan officer in Flor ida and another bor r ower in another state. You star t to see the patter n. People always want some gr eat statistic [ pr oving systemic fr aud] , but its r eally, r eally har d to do that. And statistics data doesnt always tell us what happened. I f you looked at some of the big numbers dur ing the mor tgage boom , it would look like ever ything was fine because of the fact that they r efinanced people over and over again. So essentially a lot of what was happening was ver y Ponzi-likepushing down the road the pr oblems and hiding what was going on. But I was not talking to analysts. I was not talking to high-level cor por ate executives. I was not talking to exper ts. I was talking to the lowest level people in the industr y loan officers, br anch manager s. I was talking to borr ower s. And I was doing it acr oss the countr y and doing it in lar ge number s. And when you actually did the shoe-leather repor ting, you came up with a ver y differ ent pictur e than the PR spin you wer e getting at the high level.

One day Rich Lor d [ who had just published the muckr aking book, Amer ican Nightmar e: Pr edator y Lending and the For eclosur e of the Amer ican Dr eam, Common Cour age Pr ess, 2004) and I went to his house. We wer e sitting in his study. Rich had spent a lot of time wr iting about H ousehold [ I nter national, par ent of H ousehold Finance] , and I had spent a lot of time wr iting about Citigr oup. H ousehold had been number one in subpr ime, and then CitiFinancial/ Citigr oup was number one. This was in the fall of 2004. We asked, well, whos next? Rich suggested Amer iquest. I went back home to Roanoke and got on the PACERcomputerized cour t r ecor dssystem and star ted looking up Amer iquest cases, and found lots of bor r ower suits and ex-employee suits. Ther e was one in par ticular, which basically said that the guy had been fir ed because he had complained that Ameriquest business ethics were ter r ible. I just found the guy in the Kansas City phone book and called him up, and he told me a r eally compelling stor y. One of the things that r eally stuck out is, he said to me, H ave you ever seen the movie Boiler Room [ 2000, about an unethical pump-and-dump br okerage firm] ? By the time I had r oughly ten former employees, most of them willing to be on the r ecord, I thought: this is a r eally good stor y, this is important. I n a sense I feel like I helped them become whistleblower s because they had no idea how to blow the whistle or what to do. And Amer iquest at that point was on its way to being the lar gest subpr ime lender. So, I star ted tr ying to pitch the stor y. While I had a full-time gig at the Roanoke Times, for me the most impor tant thing was finding the r ight place to place it. The Los Angeles Times liked the stor y and teamed me with Scott Reckar d, and we wor ked thr ough much of the fall of 2004 and ear ly 2005. We had thir ty or so for mer em ployees, almost all of them basically saying that they had seen impr oper, illegal, fr audulent pr actices, some of whom acknowledged that theyd done it them selves: bait-and-switch salesmanship, inflating peoples incomes on their loan applications, and inflating appr aisals. Or they wer e cutting and pasting W2s or faking a tax r etur n. I t was called the ar t depar tment blatant for ger y, doctoring the documents. You know, it was pr etty eye-opening stuff. One of the best details was that m any people said they showed Boiler Roomas a tr aining tape! And the other im por tant thing about the story was that Amer iquest was being held up by politicians, and even by the media, as the gold standar dthe company cleaning up the industr y, r ever sing age-old bad pr actices in this market. To me, their s was par tly a stor y of the tr iumph of public r elations.

L eavin g R oan ok e I d been in Roanoke almost 20 year s as a r epor ter , and so, whats the next step? I r esigned fr om the Roanoke Times and for most of 2005 I was freelancing fulltime. I m ade vir tually no money that year , but by wor king on the Amer iquest stor y, it helped me move to the next thing. I inter viewed with The Wall Str eet Jour nal [ and was hir ed to cover the bond mar ket] . Of cour se I came in pitching mor tgage-backed secur ities as a great stor y. I could have said it with mor e ur gency in the pr oposal, but I didnt want to come off as like an advocate, or half-cocked. Daily bond mar ket cover age is their br ead-and-butter , and its something that needs to be done. And I tr ied to do the best I could on it. But I definitely felt a little bit like a point guar d playing small for war d. I was doing what I could for the team but I was not playing in a position wher e my talents and my skills wer e being used to the highest. I wanted to do a documentar y. I wanted to do a book [ which would become The M onster : H ow a Gang of Pr edator y Lender s and Wall Str eet Banker s Fleeced Amer icaand Spaw ned a Global Cr isis, Times Books, 2010] . I felt like I had a lot of infor mation, a lot of stuff that needed to be told, and an under standing that many other repor ter s didnt have. And I could see a lot of the wr iting focused on deadbeat bor r ower s lying about their income, r ather than how things wer e r eally happening. Thr ough my r epor ting I knew two things: I knew that ther e wer e a lot of pr edator y and fr audulent practices thr oughout the subpr ime industr y. I t wasnt isolated pockets, it wasnt r ogue lender s, it wasnt r ogue employees. I t was r eally endemic. And I also knew that Wall Str eet played a big r ole in this, and that Wall Str eet was dr iving or condoning and/ or pr ofiting fr om a lot of these practices. I under stood that, basically, the subpr ime lender s, like Ameriquest and even like Countr ywide, wer e r eally just cr eatures of Wall Str eet. Wall Street loaned these companies m oney; they then made loans; they off-loaded the loans to Wall Str eet; Wall Str eet then sold them [ as secur ities to investor s] . And it was just this magic circle of cash flowing. The

one thing I didnt under stand was all the fancy financial alchem ythe derivatives, the swaps, that wer e added on to put them on steroids. I ts clear that people inside a company, one or two or thr ee people, could commit fr aud and get away with it, on occasion, despite the best effor ts of a company. But I dont think it can happen in a widespr ead way when a company has basic compliance systems in place. The best way to connect the dots fr om the sleazy pr actices on the gr ound to people at high levels was to say, okay, they did have these compliance people in place; they had fr aud investigator s, loan underwr iter s, and compliance officers. Did they do their jobs? And if they did, what happened to them? I n late 2010, at the Center for Public I ntegr ity, I got a tip about a whistleblower case involving someone who wor ked at a high level at Countr ywide. This is Eileen Foster , who had been an executive vice president, the top fr aud investigator at Countr ywide. She was claiming befor e OSH A that she was fir ed for r epor ting widespr ead fr aud, but also for tr ying to pr otect other whistleblower s within the company who were also r epor ting fr aud at the br anch level and at the r egional level, all over the countr y. The inter esting thing is that no one in the gover nment had ever contacted her ! [ This became Countr ywide Pr otected Fr audsters by Silencing Whistleblower s, say For mer Em ployees, September 22 and 23, 2011, one of CPI s best-r ead stor ies of the year ; 60 M inutes followed with its own inter view of Foster , in a segment called, Pr osecuting Wall Str eet, December 14, 2011.] I t was ver y exciting. We wor ked r eally har d to do follow-up stor ies. I did about eight stories after war d, many about Gener al Electric, a big player in the subpr ime wor ld. We found eight for mer mor tgage unit employees who had tr ied to war n about abuses and whom managem ent had shunted aside. I just feel like ther e needs to be mor e investigative r epor ting in the mix, and especially mor e investigative r epor tingof pr oblems that ar e going on now, r ather than post-mor tem s or ticktocks about financial disaster s or crashes or bankr uptcies that have alr eady happened. And thats har d to do. I t takes a real commitment from a news or ganization, and it can be a high-wir e thing because your e wor king on these stor ies for a long time, and market player s your e wr iting about yell and scr eam and do some r eal pushback. But ther e needs to be mor e of the sor t of ear ly war ning jour nalism. I ts par t of the big tent, what a newspaper is.