FOCUS: Karma Is a Bitch
24 December 12
arma is a bitch. Just ask Glenn Hubbard.
A few months ago, the Dean of Columbia's business school was a leading economic advisor to Mitt Romney and a rumored (perhaps even consensus) candidate for the Treasury Secretary job.
Now Romney's out of the presidential picture and
Hubbard – well, he's just yet another grasping jobholder who's been
exposed as a paid mouthpiece in a court proceeding.
Anyone who's seen the movie Inside Job will recall the stupendously angering scene
in which Hubbard pissily snaps at his interviewer for asking about his
outside relationships with the financial services industry.
In the movie, renowned filmmaker Charles Ferguson pointed out that, among other things, Hubbard had co-authored a paper
with former Goldman chief economist William Dudley in which he praised
credit derivatives as having improved the "allocation of risk" and
helped produce "enhanced stability." It was fair to ask how much
Goldman's "Global Markets Institute" had to pay one of the Ivy League's
leading minds to endorse the giant daisy chains of credit default swaps
and collateralized debt obligations that led to the crisis – it was
quite a coup, after all, like getting the Dean of Harvard Medical School
to pose in public smoking a pack of Kools.
Anyway, when asked if he did consulting work for big
banks, Hubbard refused to answer. And when asked if he just didn't
remember who was writing checks to him when he wasn't overseeing the
education of American youth, he fumed.
"This isn't a deposition, sir," he hissed. "I was polite enough to give you time, foolishly I now see. Give it your best shot."
Again, there's just nothing like karma. If your answer
to a perfectly sensible question is going to be, "Screw you, this isn't
a deposition," exactly how long do you think it'll be before you end up
actually getting deposed? And forced to answer, under oath, just how
much your opinions cost?
A couple of years, as it turns out.
Hidden among the reams of material recently filed in
connection with the lawsuit of monoline insurer MBIA against Bank of
America and Countrywide is a deposition of none other than Columbia
University's Glenn Hubbard. And boy, is it a wild deposition. It's like
Inside Job, only Hubbard has to answer the questions he doesn't want to
answer. Reading it is like watching a man try to avoid breathing in a
gas chamber.
At issue here is the fact that Hubbard testified on
behalf of Countrywide in the MBIA suit. He conducted an "analysis" that
essentially concluded that Countrywide's loans weren't any worse than
the loans produced by other mortgage originators, and that therefore the
monstrous losses that investors in those loans suffered were due to
other factors related to the economic crisis – and not caused by the
serial misrepresentations and fraud in Countrywide's underwriting.
In other words, the Dean of the Columbia University
business school testified that the fact that Countrywide claimed to have
conducted thorough due diligence when in fact it was pressuring
underwriters to approve 60 to 70 mortgage applications a day
and failing to verify any income levels or other key information (to
say nothing of the outright falsification of such data, which also went
on on a mass scale) – he testified that these issues were irrelevant.
Investors in Countrywide loans, he reported, in
specifically rebutting MBIA's claims of fraud, were probably victims of
macroeconomic factors, among other things the expansion of lending
guidelines by "the government-sponsored entities," i.e. Fannie and
Freddie. You know, that old saw.
So how much does it cost to get the Dean of Columbia
Business School to say that Countrywide customers weren't injured by
fraud? Well, MBIA's lawyer, Phillipe Selendy of Quinn Emmanuel, asked
Hubbard that very question:
Q. How are you being compensated?
A. I'm being compensated at an hourly rate for my work.
Q. Do you know your hourly rate?
A. Yes, it's $1200 an hour.
For comparison's sake, $1200 an hour is about what Natalia, the woman New York Magazine called
"America's #1 escort" in a famous profile many years ago, made early on
in her career working for Jason Itzler, the self-described "King of All
Pimps." It's not the top-end rate for the kind of Mercedes-class
prostitute you'd romp with from an outfit like the Emperors Club, but according to the L.A. Times,
it's still more than you'd have to pay for the usual "vanilla sex" or
"Republican sex." Twelve hundred dollars an hour in America buys
high-end companionship that can run a little bit kinky, if that's where
your needs lay. And that's exactly what MBIA got with Hubbard's
research.
So how did Hubbard manage to analyze Countrywide and
conclude that mass fraud in its underwriting procedures wasn't
problematic? Easy: He didn't look at the underwriting! All Hubbard did
was take a group of Countrywide loans and compare them to a group of
other loans from the same time period.
When that comparison revealed that Countrywide's loans
failed at about the same rate as the non-Countrywide loans, he smartly
concluded that fraud wasn't the problem and that macroeconomic factors
must have been the cause.
Except for one thing: He left out the fact that about
half of the loans in the "non-Countrywide" pool he selected for his
analysis were originated by companies that were also being sued for
underwriting fraud and other irregularities. What Hubbard did is compare
a bunch of bad loans to a bunch of bad loans.
What's fascinating in the deposition is the way
Hubbard repeatedly tries to avoid answering the question about what kind
of research he did, or didn't do, in his Countrywide analysis. His
sneering annoyance shines through as brightly as it did in Inside Job,
but this time he couldn't just say, "You've got three more minutes."
Here, for instance, he actually tries to play dumb when asked if he
looked into Countrywide's origination practices:
Q. Did you make any inquiry into how Countrywide actually originated its loans?
A. I'm not sure exactly what you mean by that.
Hubbard here is just being intentionally obtuse: he's
trying to see how much of an appetite MBIA's lawyers have for fighting
through his dickishness. They press on:
Q. You understand there was a process by which Countrywide originated the loans that it included in the securitizations?
A. Yes.
Q. And there was also a process by which
Countrywide examined the loans that it purchased from other originators
inclusion in securitizations?
A. Correct
Q. Did you make any factual inquiry into the
nature of either the process of origination or the process of due
diligence by Countrywide?
A. I'm not an underwriter in this proceeding, so neither of the assignments that I told you would require such.
He knows it's a yes or no question, but he's letting them know they're going to have to beat it out of him:
Q. And it's fair to say that you gave your
opinions without any inquiry into how Countrywide actually originated
its loans or how Countrywide examined the characteristics of the loans
that it purchased from other originators, correct?
A. I'm not an underwriter. As an economist,
what I can do is look at the implications of the claims made by MBIA and
its experts.
Q. So is that a yes in response to my question?
A. You have to tell me the question again.
Yikes! If I was Selendy I would have pulled out the
sponge and the car battery at this point. Fortunately, the MBIA lawyer
is more mature, and went on calmly:
Q. It's a fairly simple question. You gave
your opinions without any inquiry into how Countrywide actually
originated its loans, correct?
A: I did not underwrite.
That's as close as they got to getting Hubbard to
admit that for $1200 an hour, he swore that Countrywide's underwriting
practices were irrelevant – without investigating Countrywide's
underwriting practices.
As for the question of how Hubbard managed to omit the
fact that the loans he compared Countrywide loans to also had
underwriting problems, there was this exchange:
Q. So in the aggregate, more than half of your entire population in the control group was affected by litigation?
A. I think, well, yes, by number of pools, yes.
Q. And in neither your initial report nor your rebuttal report did you disclose that fact for the benefit of the court?
A. Well I've already told you I didn't think it was relevant from my –
Q. I'm aware that's what you said today. But
the fact is in neither your initial report nor your rebuttal report did
you disclose that more than half of all the securitizations in your
so-called control group were affected by litigation?
A. If I don't think something is a relevant fact, why would I have disclosed that?
Q. You're agreeing with me, you didn't disclose it, right?
A. That's a factual question. You had innuendo attached to it.
Q. Well, sir, I do think it's significant that
you didn't disclose that fact, that's why it's in my question. I just
wanted to confirm you did not disclose that fact, right?
A. I didn't disclose the fact.
Hubbard must be a very inquisitive thinker. He took
$1200 an hour specifically to not learn how subprime loans were created.
Moreover, he did this non-learning for Countrywide years after the
financial collapse, long after the truth about that company had already
become common knowledge pretty much everywhere in the world outside
Hubbard's office, long after Countrywide CEO Angelo Mozilo had been charged by the SEC with deliberately misleading investors (and insider trading, to boot), and long after the Attorney General of California
had concluded that Countrywide was essentially a giant scheme to use
mass fraud to dump pools of bad loans on unsuspecting marks on the
secondary market.
Given the great masses of information that was out
there about Countrywide, Hubbard in other words had to perform a labor
of Hercules to avoid letting the truth about the company slip through a
crack in his skull. Naturally, this awesome ability to non-absorb
information makes him qualified to be one of America's leading
academics. Way to go, American learning!
On a personal note, I'm bummed by this Hubbard news, because it ruins one of my favorite quotes of all time – Henry Kissinger saying that "University politics are so vicious precisely because the stakes are so small."
That was always a fantastic joke, but now that Wall
Street is subsidizing the imperious academic administrators whose only
reward used to be blocking the careers of the more brilliant teachers
and professors they secretly envied, it doesn't work anymore.
Editor's note: The name of the lawyer taking the
deposition was Phillipe Selendy of Quinn Emmanuel, not David Freeburg.
Rolling Stone apologizes for the error.
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