Editore"s Note
Tilting at Windmills

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March 28, 2008
By: Kevin Drum

ZIPPY....JPMorgan Chase has an automated system called "Zippy" for approving mortgage loans. But if it's automated, how did it manage to approve so many crappy loans? An editorial in The Oregonian provides a nickel summary:

As reporter Jeff Manning described Thursday, a JPMorgan Chase employee distributed a memo called "Zippy Cheats & Tricks," which reads like a tipsheet for beating a video game. It advises employees at the banking company how they can help mortgage brokers jigger the in-house system, called "Zippy," that evaluates loan applications. Overstate the borrower's income, it suggests. Don't mention that some borrowers are relying on gifts to repay their loans. Inflate assets. "Never fear," the memo reads. "Zippy can be adjusted . . ."

Charming. Chase, of course, is investigating, because "This is not how we do things." Indeed.

Via Calculated Risk. More here from Barry Ritholtz.

Kevin Drum 11:41 AM Permalink | Trackbacks | Comments (32)

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Comments

The actual article the editorial refers to.

Posted by: Minivet on March 28, 2008 at 11:46 AM | PERMALINK

It takes one smart computer-science major how many years of schooling and on-the-job training to be able to write a program like Zippy- and then how long for one dumb-ass MBA to think up how to fool the program, and then spread the news to all his commission-paid fellow employees?

It's really a microcosm of how easy it is for the the turd-flinging lowest area of the curve to mess up all the sohpisticated aspects of our culture, when those on the smart end of the curve aren't on the ball and aren't in charge like they should be.

Posted by: Swan on March 28, 2008 at 11:58 AM | PERMALINK

Pinheads.

Are we having fun yet?

Posted by: Cap'n Phealy on March 28, 2008 at 11:59 AM | PERMALINK

Rupert Murdoch should just hire a whole bunch of right-wing, Bible-belt hackers who are in an extended adolesence to fuck with as much of our society as possible, and tell them that it will somehow bring on the rapture (those idiots would believe it). Then this whole thing will be brought to its logical conclusion-- people will quickly recognize what jackasses all these types are.

*joking*

Posted by: Swan on March 28, 2008 at 12:08 PM | PERMALINK

You can always beat a computer program like this by making shit up. Lying that is. The computer doesn't run out and do an independent appraisal. So, if you're willing to commit fraud, as the memo advocates, no problem.

Don't people file their taxes this way all the time? Their crooked accountant says, "With your income, you can claim X in charitable deductions and the IRS computers won't even notice." So people with X-.5X actual contributions, just tell the accountant to put X down. I happen to know people who got criminally charged for doing this sort of thing on a grand scale, and it would be nice to see some Chase loan officers get the same treatment.

Posted by: David in NY on March 28, 2008 at 12:20 PM | PERMALINK

"This is not how we do things."

Isn't it obvious that this isn't how Chase does things? They can design the program to use whatever criteria they want; there's no point (from Chase's perspective) to putting requirements into the software and then evading them. The real problem is Chase's failure to manage the employees using "tricks and cheats". The lender is hurt at least as much as the borrower by loans that violate Chase's stated standards.

Posted by: Shelby on March 28, 2008 at 12:27 PM | PERMALINK

Zippity Doo Da... Tell me again why drugs are illegal, but not screwing the hoi polloi with Enron type money schemes?

Greed is good. God, I hate these people. And guess what? They hate me too.

Will there ever be an accounting for this kind of criminality?

Posted by: bobbywally on March 28, 2008 at 12:28 PM | PERMALINK

Isn't JPM the company nominated by the Fed to be their conduit to rescue Bear Stearns?

Somehow, it's not surprising.

Crony capitalism.

Posted by: Neal on March 28, 2008 at 12:29 PM | PERMALINK

Sadly I had direct experience with a parallel situation in a small insurance company. I set up rules and formulas that would have helped the branches stay away from bad business. They responded by gaming the system so they could sell the business they wanted to. I only learned of their actions much later, after the company had lost a lot of money.

Those who had finagled the system had no guilt. They didn't respect management's procedures. They felt that these requirements were just things to be gotten around so they could sell some business.

Posted by: ex-liberal on March 28, 2008 at 12:35 PM | PERMALINK

Tangentially related, but equally important, this is why Diebold's voting machines should be laughed off the planet. These things are designed for one reason only, and that's to game the system.

Posted by: junebug on March 28, 2008 at 12:42 PM | PERMALINK

And these companies want the government to help them. I say let them fail. If this is how they routinely do business then they deserve it. The company may not have written this kind of stuff in a manual, but it is hard to believe that this wasn't a known "secret" even higher up considering it was obviously not just happening because of few bad apples. Obviously JPMorgan Chase has some management issues.

The government let or basically let Arthur Andersen fail because of one client.

Posted by: ET on March 28, 2008 at 12:44 PM | PERMALINK

Those who had finagled the system had no guilt. They didn't respect management's procedures. They felt that these requirements were just things to be gotten around so they could sell some business.

Which is exactly what's been going on in corporate boardrooms of Wall Street for decades, ramping up particularly in these last few years, but your tribe screams bloody murder at the mere mention of increased regulation. Tell us again how the market sorts it all out -- and why that matters a whit to the folks who lose the value of their portfolio, their pensions, and even their homes.

Posted by: junebug on March 28, 2008 at 12:51 PM | PERMALINK

Is it a big deal? A bunch of people got loans who wouldn't otherwise, or approved for much larger amounts.

This division of JPMorgan was looking out after its interests. Institutions who bought the (bundled) loans from them didn't look after their own interests very well. Ratings agencies had conflicts of interest.

What's the worst that could happen? Credit markets are much more sluggish for a year or so. (After going gangbusters for a few years). The economy slows to .1% or slightly negative growth for a year or so (after going faster than it woulda otherwise).

And a bunch of people got more house than they woulda. Or they paid an inflated price because of (artificially) stimulated demand. No one thought that prices would ever come down? Like the tech stock bubble, the real costs will be the miss-allocation of investment and the massive dislocations to consumers. It sucks, but almost everyone had a hand in their own demise, and the only innocents would have to be unsophisticated borrowers who didn't understand the mortgages they were getting into.

Posted by: luci on March 28, 2008 at 12:52 PM | PERMALINK

Sorry, cannot let major international investment banking firms with a huge stake in our mortgages fail. Just cannot do it, not unless you want to suffer a lot of pain over a long period of time. The Arthur Anderson problem was in a different time and place. Since then the investment banks have become so inter-woven with the international monetary system that any major failure will have serious repercussions around the world. The Bear rescue was not desired by anyone, but it had to be done. Robert Rubin suggests that next time,if there must be a next time, in exchange for the debt guarantee using public funds, the Fed gets the benefit of whatever the assets turn out be be in terms of value that are guaranteed. This would be similar to the Resolution Trust solution to the S&L crisis, and its a good idea.

I also suggest that the Federal Government provide laws and regulations that would (a) mandate a refinancing of ARM's if the borrower could demonstrate an ability to pay the new 30 year mortgage payment, regardless of credit history, and (b) prohibit 100% financing, interest only mortgages, and ARMs where the borrower cannot demonstrate an ability to pay after the initial low rate expires. Obviously, much closer Federal regulation of this entire part of the market is required to try and avoid future problems that require taxpayer funds to fix.

Posted by: Jammer on March 28, 2008 at 12:53 PM | PERMALINK

Also, JP Morgan has the healthiest balance sheet and seems to have done the least of this kind of questionable lending, which is why they were the ones selected to take over Bear.

Posted by: Jammer on March 28, 2008 at 12:55 PM | PERMALINK

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
The Glass-Steagall Timeline
.....Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public.

Posted by: Jet on March 28, 2008 at 12:57 PM | PERMALINK

Isn't this pretty much the modus operandi Bush/Rumsfeld/Cheney used to OK-but-not-OK torture?

Posted by: The Confidence Man on March 28, 2008 at 1:03 PM | PERMALINK

Mortgage clients paid a lot of money to expert realtors and mortgage brokers/lenders who assured them that home prices would continue to rise and that the increased values of their homes would pay for the refinance of their ARM's. Mortgage clients were victims of professional malpractice by these experts they paid commissions to. The largest and most astute financial institutions were in on the scheme, but they were fooled by their own lies.

Unfortunately, the real pinheads were the voters who bought into the bipartisan lies about how deregulation of the financial markets would increase economic wealth. They bought into the bipartisan lies to invade Iraq, too. They are now buying bipartisan immigrant hate. When tomatoes are $20/lb. they will blame Ahmadinejad an Hugo Chavez.

Posted by: Brojo on March 28, 2008 at 1:09 PM | PERMALINK

The Zippy computer program's first assumption is that the Chase employees entering the data are honest and are generally loyal to the company. Image, Chase's senior management apparently expected honesty and loyalty out of Chase employees. How quaint.

What a lot of MBA pukes running American companies don't understand is that you can't expect more out of employees than you are willing to give them.

Posted by: Ron Byers on March 28, 2008 at 1:19 PM | PERMALINK

What I want to know is if all the people in middle age and older now that live in blue state metro areas and have owned homes there for a generation or more are prepared to admit that their homes have soared in value over the last quarter century because not enough new housing in their area was built to meet demand and that local opposition (maybe including theirs) to new development is as much to blame for this crisis as bad lending practices and anything else.

Posted by: Linus on March 28, 2008 at 1:25 PM | PERMALINK

The ultimate problem, of course, is the same thing Reagan did, both implemented expansion of government that was unaffordable, the ratio of federal economy to private sector running up to 25% for both, compared to Clinton 18%.

The only way these Republican socialist frauds can get away with this was to look the other way as banks inflated the expected future vale of houses so we could borrow on future houses to pay for more Republican socialism today.

Ultimately, voters need to know who are the socialists and who are not, it is hard to tell by party affiliation.

Posted by: Matt on March 28, 2008 at 1:31 PM | PERMALINK

dumb-ass MBA

Many Americans know how these business systems and ethics work. Corporations develop systems and mission statements that acknowledge virtue is a necesasary value for their business models. Executive management approves of these systems and declarations of ethics standards in their public pronouncements then go to management meetings and pound on lower level managers to deliver on the exaggerated financial forecasts given to share holders and Wall Street analysts or risk termination. The lower level managers then devise ways around the ethical standards in order to meet the expectations of their bosses. For the bosses it is a sweet system. They have deniability for ethical lapses and the large bonuses those ethical lapses produced.

Posted by: Brojo on March 28, 2008 at 1:56 PM | PERMALINK

Linus: no.

Posted by: Diana on March 28, 2008 at 2:03 PM | PERMALINK

"This is not how we do things."

Looks to me like it was exactly how they did things.

Posted by: jeri on March 28, 2008 at 2:05 PM | PERMALINK

Back in a more innocent time, these results might simply have been called GIGO - garbage in, garbage out. But as I recall, that was reserved for sloppiness or data inadequacy, not malevolence or fraud.

Posted by: MaryCh on March 28, 2008 at 2:47 PM | PERMALINK

David in NY wrote:

You can always beat a computer program like this by making shit up. Lying that is. The computer doesn't run out and do an independent appraisal. So, if you're willing to commit fraud, as the memo advocates, no problem.

Now hold on a second there pardner. I thought that the computer programmers who take computer courses and thereby achieve omnipotence, when they write programs like Zippy, can't be beat by some Business major, or Communications major, or whatever, who just figures out "garbage in, garbage out," 1-2-3, and I thought all the smart-smart people were so smart-smart that they couldn't get scammed by the conservatives, couldn't let the conservatives rig elections, couldn't let their country become a home to something like Fox News, an idiotic propaganda channel posing as an unbiased cable news channel. Why hasn't smarty-smartness doen this? Isn't every person who felt like they were smart in high school omnipotent and omniscient? What gives?

Will we have to try harder or try new things in order to bring the conservatives out of power? Bummer!

Posted by: Swan on March 28, 2008 at 3:44 PM | PERMALINK

Those who had finagled the system had no guilt. They didn't respect management's procedures. They felt that these requirements were just things to be gotten around so they could sell some business.

I really Really hate to agree with ex-liberal but I must.

This is basic human nature. People will always find ways to get what they want, and those ways include lying and stealing and fraud.

That is the huge blind spot most Libertarians have. They admit that people are greedy so they rely on that but then they fail to admit that people are determined and will do many things including bad things to get what they want.

When Personnel departments existed (you know, before humans became fungible resources) they actually knew that you better be really careful what you measure in your employees because you will always get it.

if people get a bonus for putting a number in a box then by golly you'll get a number in the box.

Wait - that number was supposed to represent some honest truth about something? Nobody said that.

Posted by: Tripp on March 28, 2008 at 4:53 PM | PERMALINK

Linus,
What I want to know is if all the people in middle age and older now that live in blue state metro areas and have owned homes there for a generation or more are prepared to admit that their homes have soared in value over the last quarter century because not enough new housing in their area was built to meet demand and that local opposition (maybe including theirs) to new development is as much to blame for this crisis as bad lending practices and anything else.

Sorry Charlie. I dodged that bullet by living away from urban areas. My home price has neither soared nor burst. But then I never thought of my home as a money making proposition.

Posted by: Tripp on March 28, 2008 at 5:00 PM | PERMALINK

Chase is our bank and has significant assets of ours from our retirement planning. You can be sure I will call our investment banker and get the skinny on this. That's not how we do things isn't quite good enough!!

The wrong answer ultimately will cause us to move all of these funds to an honest investment bank, if there is such an animal any more!

Posted by: Rain39 on March 28, 2008 at 7:01 PM | PERMALINK

...A bunch of people got loans who wouldn't otherwise, or approved for much larger amounts. This division of JPMorgan was looking out after its interests. Institutions who bought the (bundled) loans from them didn't look after their own interests very well. Ratings agencies had conflicts of interest...

Well, one thing did happen for sure. Shit flowed uphill for a while. That's pretty interesting.

Posted by: Doc at the Radar Station on March 28, 2008 at 7:35 PM | PERMALINK

Jammer you think JPM is safe and guiltless and that is why they were selected to take over bear?

Look at the size of their derivatives book you damn fool - guess who is on the other side of those trades.

Posted by: errr wat? on March 29, 2008 at 6:11 AM | PERMALINK

Every single mortgage lender uses automated underwriting systems. You can inflate assets or play with the numbers all you want to get your approval. But you better be able to validate the information for the human underwriter or else your automatic approval is out the window.

Posted by: plane on March 29, 2008 at 2:00 PM | PERMALINK




 

 

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