The doctor makes a ‘House’ call
in David Faber’s ‘Caved In’
Posted: Thursday, July 2, 2009
David Faber's And Then the Roof Caved In unfortunately is a bit late to the party. When his very impressive documentary, "House of Cards," premiered in February — a rare two-hour CNBC original — it was extremely timely and worth the whole 120 minutes. This book, mostly a background/companion piece to that effort costing $26.95 hardcover, is well-written and a fine resource. But it feels a bit unnecessary for those who've seen the TV show.
The book is a reporter's chronicle of his own reporting during a significant national event. Faber prepares readers for this in his prologue, where the word "I" appears 55 times over 10 pages. This is not an ego trip, at least not overtly.
But this is not All the President's Men either, and Faber struggles mightily to find a protagonist.
The prologue implication is that this won't be wonky stuff, but an explanation of the system and the real people involved. Unfortunately those people are not as compelling scattered throughout a book as they were in limited soundbites on TV. Faber has two choices for a compelling story: Daniel Sadek and Kyle Bass. The first got rich in the subprime mortgage arena; the second got rich betting against it.
But there is a problem with Sadek — he wouldn't talk to Faber, at least until the very end of the project, and apparently only briefly on the phone. This was a problem in "House of Cards," in which Sadek doesn't get the screen time he requires.
The problem with promoting Bass is that it might conflict with Faber's anti-greed message sprinkled throughout the book and expressed emphatically at the end. Also, Bass is not a particularly interesting person, and if he were, Faber would have to lean on this self-professed longtime, important source for more details about his investing operation that Bass probably doesn't want to divulge for competitive reasons.
So who does Faber lead off with? Alan Greenspan.
That an investigative reporter landed this interview is somewhat impressive. However the interview says more about Greenspan than it does Faber. The former hero of stock investors has seemingly spoken to anyone with a microphone in the last two years, eager to prevent his legacy from being classified as something resembling "subprime."
Faber acknowledges this, first by qualifying his description "widely regarded as one of the greatest Fed chairmen" with "until recently," and then saying "one reason" Greenspan agreed to talk was because his "legacy has been tarnished."
But Faber nevertheless refers to Greenspan as "Dr.," a term media organizations generally do not use for non-medical-degree recipients, and later "good doctor." Greenspan actually received his NYU Ph.D. in 1977 in somewhat curious circumstances, and Barron's even took up the (mild) controversy surrounding his dissertation. Faber also relays an anecdote about keen interest in selling Greenspan's half-eaten muffin from their interview. He goes on to open four of the book's 11 chapters by referring to Greenspan. There is a reporting bias here, not necessarily a bad one, but clearly a healthy appreciation for the subject.
Greenspan is a subject who has long since become passe and uninteresting book material, now a source of interest really only to the types of Fed-critical wonks who often appear on the "The Kudlow Report" and certain other CNBC programs.
Faber's book would bolster its own substantive credentials by asking outside experts to comment on what Greenspan told him, and then publish those experts' comments. That would offer unbiased views as to how culpable the Fed should be — perhaps significantly, perhaps not at all — for whatever its regulatory role might have been. Instead, while Faber does express his own opinions, the "good doctor's" statements are mostly left at face value.
Sadek leads a much faster lifestyle than Greenspan. Faber acknowledges, though, that all the great reporting on Sadek has been done by John Gittelsohn of the Orange County Register. Sadek has a third-grade education but Ph.D.-level street smarts. He sold pricey cars and realized the buyers were often guys selling mortgages. So that's what he started doing, and made a fortune. This is the star witness Faber needs for a more engaging book, but he doesn't have him.
Perhaps it's to Faber's credit that he sees no appeal in Sadek, but he comes across as out-of-touch during an ill-advised mention of the movie Sadek financed, "Redline." First Faber admits "I have not seen 'Redline,' " but then says he outsourced this part of the production to his producer, Mary Catherine Wellons. Wellons, he says, is an "educated young woman, an honors graduate of the University of Virginia who frequents many of the cultural offerings of New York City. She said 'Redline' may be the worst movie she has ever seen."
"Redline" is clearly a B movie. It is not a great movie. It is not the worst movie ever made, either, and occasionally plays on cable. It is clearly made for 15-to-25-year-old males who like fast cars and fast women. Most of these viewers will never be honors graduates at Thomas Jefferson U., nor will they adequately appreciate the cultural offerings of New York City.
They are, however, people who might've been inclined to try a subprime mortgage, or people who never got beyond their one-bedroom apartment but became some of the first on the unemployment lines because Wall Street was financing this garbage at a more reckless pace than anything seen in Sadek's movie.
This element is very important yet omitted in Faber's book. Faber's book and documentary — and there is nothing wrong with this, every production has a targeted audience — are for the typical CNBC viewer, which means college-educated, stock-owning, 401(k)-contributing, WSJ-reading, Burton-Malkiel-absorbing, Starbucks-consuming, BlackBerry-owning, athletic-club-belonging, Eagles/Prince/Jimmy Buffett/Police-listening and European-traveling.
Those people tend to scoff at subprime loans. The "Redline" crowd does not. They want or need things like easy credit, no money down, maybe an overnight tax refund loan, maybe a rental TV or furniture, maybe a payday shop in their neighborhood. When Wall Street decides it can flood this level of credit risk with huge amounts of cash, bad things are going to happen. Sadek catered to these people on a couple of levels. It is correct to denounce Sadek and his business, but Faber misses a chance to put the demand of this marketplace, and ability of people like Sadek to satisfy it, in context.
Bass' way to the top — unlike Sadek, he's still there — is also interesting. He's a dedicated short seller, trying to identify companies with the most dubious potential unknown to most investors. His most interesting tactic is finding out if people with past histories of chicanery are behind existing ventures. But he also did interesting detective work on Sadek, calling the company as a "mortgage participant" to get a ground-level description of how it operates, watching Sadek's movie and keeping tabs on the Web site, which apparently never was completed.
Even so, Bass' ultimate success in finding mortgage securities to short required not only his years of training in the field but a "self-study" course in securitization that included reading Collateralized Debt Obligations: Structures and Analysis. This is where Bass ceases to be a compelling story and morphs into savvy-whatever-trader-yawn.
Some will wonder where the Wall Street coverage is. Faber does his best to paint a portrait of Merrill Lynch's Stan O'Neal, but other than a couple good nuggets — O'Neal plays golf alone and ordered CNBC removed from Merrill's TV sets — this is a distant characterization, as though Faber had sources near O'Neal but not near enough, and it makes one wonder why other CEOs dealing in these markets aren't similarly detailed. His prologue description of the CNBC reporting assignments on the weekend of Lehman's demise isn't decisive as to his own role. "The Lehman and Merrill stories were being well covered by our own reporters and our competitors, so I focused on AIG," he writes, but after the prologue, according to his own index, AIG isn't mentioned again until Page 83.
The book is best when it's simple. One important, simple point Faber makes is that loan originators who sold mortgages to Wall Street were in the clear on those mortgages if 90 days passed without a default.
He also makes clear that the ratings agencies were simply not reliable, and why, and writes very effectively about the traditional role of Fannie Mae and Freddie Mac and their sidestepping of the aggressive lending space. However, in both instances he delves into too much detail after the point is made.
What the book adds to the TV production is a series of descriptions and diagrams, in very understandable terms, of the mortgage products flooding our banking system. Only once does this get burdensome, in Chapter 7, titled "The Securitization from Hell." Re-reading some of the passages only makes it worse. The point is that the demand for mortgage instruments was enormous, and there were no longer enough traditional types of these securities to sell, so they invented exotic new ones. This material may be of interest to the handful of insiders taking part in this, but too dense to even be cocktail-party-adaptable for the interested reader who just wants to know.
One unspoken message of the book is that bad things often happen not because of one thing, but a perhaps fluky confluence of several. In 2001 we had people burned by tech stocks who still had money and wanted to invest it in something more reliable than the Nasdaq. We also had a steep lowering of interest rates, an ongoing push by government to get more mortgages to lower-income buyers and a long historical pattern of strength in home prices. Mortgage lender Bill Dallas tells Faber, "Subprime was dead and almost buried. And right before it got buried, we had September 11th."
So anyone buying a home in 2002 was rapidly seeing price gains, attracting others who otherwise wouldn't be buying a second home or flipping or refinancing, leading to these outrageously complex instruments Faber discusses in Chapter 7 that ultimately sank the ship. Why would all of these smart people on Wall Street, such as Stan O'Neal, continue plowing in so much money to these dubious investments? Jim Cramer offers the best rationale during his famous appearance with Jon Stewart this year:
Stewart: "But honest or not, in what world is a 35 to 1 leverage position sane?"
Cramer: "The world that made you 30% year after year after year beginning from 1999 to 2007."
Faber leads Chapter 2 with the brief story of Arturo Trevilla. This is another significant element of the housing crisis, consumers willingly choosing to buy homes they could not realistically afford using whatever means necessary. Faber says Trevilla signed a mortgage application stating he earned $16,000 a month when the truth was that he earned $3,600 a month. The next sentence does not say "Trevilla lied and paid a price for it." It says, "Trevilla admits he didn't really understand all the terms of the contract he signed." That's followed by Trevilla's goals, a safe place for his kids to play and the motivation to start his own embroidery business which somehow would be boosted by buying this home. Was there a mortgage broker wanting this to happen? Sure, in all likelihood, but is there any room for sympathy for someone who wrote "$16,000" in the monthly income box despite earning a fifth of that?
Faber's trip to Norway was a bit flat on TV and is less compelling in the book. The point — and according to Faber many other U.S. news organizations had the same idea — was to show how the U.S. financial crisis was nailing communities in remote parts of the globe. The town somehow got bamboozled into buying junk, and lost money. Nevertheless, it still looks like a peaceful place, and there are no visible soup lines. In fact, Narvik has much in common with a theme trumpeted recently on this site but evidently nowhere else — news articles blaming the "tumbling stock market" for steep declines in museum endowments when in fact it was the decision to seek market- or above-market returns that put the money at risk to begin with.
The book is only 180 pages yet seems overdone with photos made large to fill space. Faber overdoes it on acronyms throughout; generally they are not needed. He uses the completely outdated and inaccurate term "inner city" in Chapter 2. For grammar cops, in Chapter 5, there is "everyone one." Erin Callan got misspelled in the index. On Page 29 Faber writes, "By 2000, as George W. Bush began his first term," when in fact George W. Bush did nothing of the sort in 2000 except finally be declared the winner in early December.
He twice mentions that Greenspan is 82, at beginning and end. Once makes journalistic sense; twice suggests Faber might view this person as someone who held on to a very important job for too long.
This book has been heavily promoted by Faber in segments on CNBC and the "Today" show. He is gracious about crediting his CNBC "House of Cards" team in the book. It will serve as a handy reference guide on a bookshelf somewhere but won't be passed along as required reading. "House of Cards" has proved, rightly so, to be a major hit, an ongoing source of inquiries to this site. And Then the Roof Caved In feels a bit too much like an expensive study guide, albeit a well-written one, about an event that many people are longing to put behind them.
Faber offers various points of view, many predictable, but fails to seal the deal with a resounding message. He makes a half-hearted effort on his final page of the regular book, saying "Greed is the fuel that makes our capitalist system run." He writes, "When I asked Alan Greenspan about it, he agreed ... and said: 'And you're going to outlaw that? Go ahead and try it.' "
Yes, greed is bad. Does Faber really believe all profit-seeking is greed? Kyle Bass, a "true short seller," made a $2 billion profit betting against mortgage securities. Faber does not call this "greed," but a "once-in-a-lifetime trade." Howard Kurtz wrote of Faber in The Fortune Tellers, "He was hardly underpaid by cable television standards ... (but) he would find himself chatting with some upstart twenty-seven-year-old who was making $3 million a year and wondering if he had set his own sights too low. Occasionally he thought about making the leap, about chasing his own fortune..."
It's unclear if Kurtz got that straight from Faber or another source. Certainly there is nothing wrong with Faber or anyone else having that notion. His ending to And Then the Roof Caved In can do better than caving in to ill-defined popular slogans. Suggesting that outlawing such an imprecise description as "greed" would make the world safe for business is not the most fitting conclusion for a very well-detailed project.
And Then the Roof Caved In (2009)
Featuring: Alan Greenspan, Kyle Bass, Daniel Sadek, Mary Catherine Wellons, James Jacoby, Jill Landes, Patrick Ahearn, Josh Howard, Mitch Weitzner, Mark Hoffman, Jonathan Wald, Michael Francis, Ira Wagner, Mike Beuscher, Stan O'Neal, Bill Dallas, Ernesto Contreras, Karen Kuvaas, Narvik, Richard Fuld, Chuck Prince, Alan Fournier, Joseph & Barbara Dunkley, John Devaney, Sheila Bair, David Komansky, Lou Pacific, Arturo Trevilla, Meg Whitman