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Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis

October 31, 2011 by Credit.com 0 Comments

By Braden Goyette, ProPublica, Oct. 26, 2011, 2:56 p.m.

Widespread demonstrations in support of Occupy Wall Street have put the financial crisis back into the national spotlight lately. So here’s a quick refresher on what’s happened to some of the main players, whose behavior, whether merely reckless or downright deliberate, helped cause or worsen the meltdown. This list isn’t exhaustive—feel welcome to add to it.

Mortgage originators

Mortgage lenders contributed to the financial crisis by issuing or underwriting loans to people who would have a difficult time paying them back [1], inflating a housing bubble that was bound to pop. Lax regulation [2] allowed banks to stretch their mortgage lending standards and use aggressive tactics to rope borrowers into complex mortgages that were more expensive than they first appeared. Evidence has also surfaced that lenders were filing fraudulent documents to push some of these mortgages through [3], and, in some cases, had been doing so as early as the 1990s. A 2005 Los Angeles Times investigation of Ameriquest [4] – then the nation’s largest subprime lender - found that “they forged documents, hyped customers’ creditworthiness and ‘juiced’ mortgages with hidden rates and fees.” This behavior was reportedly typical for the subprime mortgage industry. A similar culture existed at Washington Mutual [5], which went under in 2008 in the biggest bank collapse [6] in U.S. history. Countrywide, once the nation’s largest mortgage lender, also pushed customers to sign on for complex and costly mortgages that boosted the company’s profits [7]. Countrywide CEO Angelo Mozilo was accused of misleading investors [8] about the company’s mortgage lending practices, a charge he denies.  Merrill Lynch [9] and Deutsche Bank [10] both purchased subprime mortgage lending outfits in 2006 to get in on the lucrative business. Deutsche Bank has also been accused of failing to adequately check on borrowers’ financial status [11] before issuing loans backed by government insurance. A lawsuit filed by U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them [12]. A Deutsche Bank spokeswoman said the claims being made against the company are “unreasonable and unfair,” and that most of the problems occurred before the mortgage unit was bought by Deutsche Bank.

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Where they are now

Few prosecutions have been brought against subprime mortgage lenders. Ameriquest went out of business in 2007 [13], and Citigroup bought its mortgage lending unit. Washington Mutual was bought by JP Morgan in 2008. A Department of Justice investigation into alleged fraud at WaMu closed with no charges [14] this summer. WaMu also recently settled a class action lawsuit [15] brought by shareholders for $208.5 million. In an ongoing lawsuit, the FDIC is accusing former Washington Mutual executives Kerry Killinger, Stephen Rotella and David Schneider of going on a “lending spree, knowing that the real-estate market was in a ‘bubble.’ [16]” They deny the allegations. Bank of America purchased Countrywide [17] in January of 2008, as delinquencies on the company’s mortgages soared and investors began pulling out. Mozilo left the company after the sale. Mozilo settled [18] an SEC lawsuit for $67.5 million with no admission of wrongdoing, though he is now banned from serving as a top executive at a public company. A criminal investigation into his activities fizzled out earlier this year. Bank of America invited several senior Countrywide executives to stay on and run its mortgage unit. Bank of America Home Loans does not make subprime mortgage loans. Deutsche Bank is still under investigation by the Justice Department [10].

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Mortgage securitizers

In the years before the crash, banks took subprime mortgages, bundled them together with prime mortgages and turned them into collateral for bonds or securities, helping to seed the bad mortgages throughout the financial system. Washington Mutual, Bank of America, Morgan Stanley and others were securitizing mortgages as well as originating them. Other companies, such as Bear Stearns, Lehman Brothers, and Goldman Sachs, bought mortgages straight [19] from subprime lenders, bundled them into securities and sold them to investors including pension funds and insurance companies.

Where they are now

This spring, New York’s Attorney General launched a probe into mortgage securitization [20] at Bank of America, JP Morgan, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing boom. Morgan Stanley settled with Nevada’s Attorney General [21] last month following an investigation into problems with the securitization process. As part of a proposed settlement with the 50 state attorneys general over foreclosure abuses, several big banks were offered immunity from charges related to improper mortgage [22] origination and securitization. California and New York have withdrawn from those talks [23].

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Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis (cont.) »

Image: Dipsey, via Wikimedia Commons

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