Cruising a second hand book shop, I picked up a copy of James Shurlock's book published early 2007 for $6.95. The book and the documentary was an indictment on the US Financial Industry. This was all just before the tsunami of the Sub Prime hit.
This article was in the Washington Post August 2007, a few months later
When the film "Maxed Out" arrived in theaters in March, it met with a modest reception: James Scurlock's documentary about America's debt crisis featured crisp editing, engaging stories, a poppy music score and an urgent message about Americans' addiction to credit, our alarming level of personal debt, and the financial services industry's cynical attempts to exploit both. The film stayed in town for only three weeks -- who wanted to see a movie about the subtle inner workings of subprime mortgages?
What a difference a few months make. With subprime loans suddenly in the headlines and a looming financial crisis erupting over the summer -- in other words, with the film's Cassandra-like warnings largely coming true -- it seemed an opportune time to catch up with Scurlock, whose "Maxed Out" is now available on DVD and will appear on television early next year .
-- Ann Hornaday
So, are you a genius, or what?
It's funny, it really wasn't that difficult to understand. In some ways, it's just mathematics. Yet there are regulators and analysts and investment bankers who do this day in and day out for years and years, who were saying the opposite of what I was saying. But for someone like me to come in and spend six months snooping around this industry and come to a pretty clear conclusion about where it was headed, it just tells you it wasn't all that difficult. And it's going to get a lot worse, by the way.
What?
What has happened in the mortgage business and in the credit business in this country is very similar to what happened at Enron. . . . People forget that what brought Enron down at the end of the day, the first domino that caused everything to collapse, was a downgrade from a credit agency, and that set in motion a series of events that no one really could have anticipated in their scope, or the precise sequence of events. I think that's exactly what we're looking at now. When the credit agencies have to downgrade a lot of this debt, and they will, and you have hundreds of billions of these adjustable-rate mortgages resetting at higher rates before the end of the year, suddenly all these investment funds have to sell them. And that's a very scary scenario. When everyone's selling and you don't have any buyers, that's when you have a crash.
One of the most memorable subjects in "Maxed Out" was a real estate agent named Beth Naef, who was selling multimillion-dollar spec homes in Las Vegas, often using the same financing that Enron engaged in. She herself was buying a 11,000-square-foot "dream home," which she was planning on "flipping" later. How is she doing?
I don't know, because she's one of the few people from the film who doesn't care to talk to me anymore. And I can understand that. . . . I think you can read between the lines and tell that if she couldn't afford that house two years ago, she can't afford it now. Hopefully she got out, but that means someone else got in.
You show debt collectors in "Maxed Out" in a highly critical light, yet you spoke at one of their conventions earlier this year. How did that go?
You'd think they would be my natural enemies, yet they were a terrific audience. Everybody is really worried about this, even the debt collectors. Because the first thing they look for, the way they make an easy profit, is if someone has access to more credit, so they can pay bad debt with a card or a refinance or a home equity loan.
But these refies that were keeping everything going a little longer and masking the big problems are suddenly drying up. The tragedy is that they're drying up just as so many people need them to save themselves from their mortgages resetting and their payments doubling. So it really is kind of a perfect storm right now.
How do you think the crisis is being handled in Washington?
I think it's been exacerbated by people like [Federal Reserve Chairman] Ben Bernanke and [Treasury Secretary] Henry Paulson and others coming out and saying, "Oh, subprime isn't contagious" . . . as if subprime borrowers were like lepers confined to some colony on an island and couldn't swim over and infect the rest of us. . . . Now that it has spread, the party line is "The economy's strong and we'll power through this." But the only way you power through a crisis in our economy is by making sure people keep spending. And the news this week from Wal-Mart and Home Depot is that people are starting to pull back. If you use your common sense, clearly if someone has been using their home equity to pay for their credit card bills, and refinancing and refinancing and refinancing to pay their bills, if they can't refinance anymore, they can't spend anymore. So lo and behold, Home Depot says people won't be remodeling their kitchens. The myth of the house increasing in value every year as some kind of birthright is now being shattered, and people are realizing that maybe a Sub-Zero refrigerator isn't an investment; maybe it's just another expense.
What's next?
I don't claim to predict the future, but if you ask me to hazard a guess, the default rate for mortgages is now higher than the default rate for credit cards by quite a bit. So people are giving up their homes rather than lose their credit cards. It's a really interesting phenomenon, because the assumption was always that people would do anything to save the house. . . . But who do the banks have to blame for that [phenomenon]? All of their marketing now is "Use your credit card to pay for groceries, prescription drugs, taxes and everything else." It's a huge paradigm shift.
Are credit cards the next shoe to drop?
Without question. One of the big problems, maybe the big problem, is that the financial services industry has redefined cash as credit. They have spent billions and billions and billions of dollars teaching people that a credit card is the same as cash, that home equity is the same as cash. And of course, it's not true. . . . And people have used their credit cards as their emergency fund instead of saving. People forget that credit is not something you own. It can be taken away at any time, the terms and conditions can be changed at any time, the costs can be increased at any time. That's what companies like the Countrywide Financials and the American Home Mortgages are learning. But I think consumers are about to learn that lesson as well.
What's your next project?
I'm working on a book about Larry Hillblom, the founder of DHL. He led quite an illustrious life. He disappeared in a plane crash in 1995 and his behavior ended up instigating one of the biggest paternity-slash-estate battles in American history.
Sounds like a movie.
We're in discussions.
Washington Post | Thursday, August 16, 2007
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