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Roland Arnall

 

Market insight: The subprime blame game begins

By Gillian Tett

Published: December 6 2007 18:11 | Last updated: December 6 2007 18:11

As the subprime rot has spread in recent weeks, the stink has reached some unexpected corners of the world. Indeed, it has even spread to the unlikely location of the Hague, in the Netherlands.

A couple of years ago, a new US ambassador was appointed to this corner of Europe – Roland Arnall, a billionaire businessman and major donor to the Republican party.

It has now caught the attention of parts of the US political world that the company created and run by Mr Arnall, which was formerly known as Ameriquest, also used to be a huge player in the US subprime mortgage world.

Indeed, a host of class-action suits have been launched over the last two years which accuse the former Ameriquest of having engaged in predatory practices (the company was sold this year after it settled one suit for $325m, without acknowledging wrongdoing). Some American lawyers and subprime borrowers are now threatening to turn their fire on Mr Arnall as well – notwithstanding his current job in the Hague.

Mr Arnall and the US embassy yesterday declined any comment on the matter (and I personally have no evidence that Ameriquest’s practices were any better, or worse, than those prevalent in the rest of America’s subprime market in recent years).

But whatever the precise details of the Ameriquest case, the saga highlights two bigger points about how the credit mess is unfolding. First, there are signs that the political ramifications of this credit tale are set to turn uglier in the coming months. A US presidential election is looming, and the Democratic party is eager to find new political ammunition with which to attack President George W. Bush. Hence, no doubt, the fact that bloggers in US cyberspace have recently started paying more attention to men such as Mr Arnall.

Second, what could make the mudslinging particularly ugly is that it is becoming clear to politicians, investors and bankers alike that there is no magic bullet available to quickly end the subprime woes – and certainly not before the next election.

For sure, there are some policy steps which the government could take to buy time. A proposed freeze on mortgage “resets”, for example, might boost confidence for a while. Similarly, creating a so-called “superfund” could delay the day of reckoning on some troubled securities. Cutting US interest rates should also soothe investor fears.

But all of these steps come with significant potential costs – and measures such as a mortgage freeze will be extraordinarily difficult to implement effectively. So tricky, in fact, that subprime is starting to seem the financial equivalent of the Iraq war in US policymaking terms: namely a problem so fiendishly multifaceted that almost any step to resolve it risks unleashing new woes.

Given that, many politicians are eager to find somebody – anybody – to blame. But that is not entirely easy either. After all, foreigners (say, the Chinese) cannot be blamed for the subprime woes. And while some politicians think rating agencies are convenient whipping boys, policymakers know that if that line of attack goes too far, it risks undermining investor confidence in the entire credit world.

Similarly, while it might seem tempting to slap subpoenas on a few Wall Street banks – as the New York state attorney-general’s office is doing – this may not necessarily deliver easy scapegoats either. After all, the subprime mess was not a conspiracy cooked up by a few investment bankers; it arose from practices that were endemic to Wall Street.

And while some politicians have tried to demonise the mortgage brokerage industry instead; even that route is far from risk-free in political terms. For sure this sector urgently needs better regulation. But the unpalatable truth is that companies such as Ameriquest have not been operating as isolated, or marginal players, in recent years. Instead, they were part of a broader, tightly entwined system of politics and finance.

Hence the lack of an easy “magic bullet” to solve the subprime mess. And hence the fact that Mr Arnall is now representing the interests of America overseas. It is, perhaps, a peculiarly fitting monument to these troubled times.

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