The Bad Guys of Subprime Lending Are Raking in Bailout Billions

The Bad Guys of Subprime Lending Are Raking in Bailout Billions

Naming the top 25 lenders and their Wall Street backers that juiced the subprime industry.

By John Dunbar and David Donald, The Center for Public Integrity. Posted May 20, 2009.

The following report is part of a larger study by the Center for Public Integrity on the roots of the financial meltdown. The list of the top 25 lenders responsible for nearly $1 trillion of subprime loans, according to a Center for Public Integrity analysis of 7.2 million “high interest” loans made from 2005 through 2007 is at the bottom of this article.

The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or bankrolled by banks now collecting billions of dollars in bailout money -- including several that have paid huge fines to settle predatory lending charges.

These big institutions were not only unwitting victims of an unforeseen financial collapse, as they have sometimes portrayed themselves, but enablers that bankrolled the type of lending that has threatened the financial system.

These are among the findings of a Center for Public Integrity analysis of government data on nearly 7.2 million "high-interest" or subprime loans made from 2005 through 2007, a period that marks the peak and collapse of the subprime boom. The computer-assisted analysis also reveals the top 25 originators of high-interest loans, accounting for nearly $1 trillion, or about 72 percent of such loans made during that period.

The Center found that U.S. and European investment banks invested enormous sums in subprime lending due to unceasing demand for high-yield, high-risk bonds backed by home mortgages. The banks made huge profits while their executives collected handsome bonuses until the bottom fell out of the real estate market.

Investment banks Lehman Brothers, Merrill Lynch, JPMorgan & Co., and Citigroup Inc. both owned and financed subprime lenders. Others, like RBS Greenwich Capital Investments Corp. (part of the Royal Bank of Scotland), Swiss bank Credit Suisse First Boston, and Goldman Sachs & Co., were major financial backers of subprime lenders.

According to the Center's analysis:

* At least 21 of the top 25 subprime lenders were financed by banks that received bailout money -- through direct ownership, credit agreements, or huge purchases of loans for securitization.
* Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were not banks and were not permitted to collect deposits.
* Eleven of the lenders on the list have made payments to settle claims of widespread lending abuses. Four of those have received bank bailout funds, including American International Group Inc. and Citigroup Inc.

The Center also conducted a computer analysis of more than 350 million mortgage applications reported to the federal government between 1994 and 2007, and found that the amount of money spent by homeowners on their mortgages as a percentage of their income spiked sharply during the peak of the subprime boom.

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http://www.alternet.org/workplace/140130/the_bad_guys_of_subprime_lending_are_raking_in_bailout_billions/

A travesty of democracy

Democrats, Republicans conspire to remove Wall Street bailout from election debate

By Patrick Martin
WSWS.org
27 September 2008

Closed-door talks continued throughout the day Friday between congressional Democratic and Republican leaders and the Bush administration, with all sides pledging to reach agreement on terms of a $700 billion bailout package for the US financial system before the Asian stock markets open Monday morning—Sunday afternoon in the US.

Both parties agree on one fundamental principle: The American people will have no say whatsoever in an arrangement that will compel them to pay for the losses of bankers and speculators who created the financial disaster. That is the content of the demand on all sides that “politics” be kept out of the bailout talks.

Democrats were particularly insistent on this question. Democratic presidential candidate Barack Obama said after Thursday’s meeting at the White House blew up in acrimony, “When you inject presidential politics into delicate negotiations, it’s not necessarily as helpful as it needs to be.”

Congressional Democratic leaders followed suit. Senate Majority Leader Harry Reid said, “The insertion of presidential politics has not been helpful.” His deputy, Senator Dick Durbin of Illinois, added, “Bringing the presidential political campaigns to the halls of Congress is not going to make this any easier.”

This is the same argument made by some of the same Democrats in October 2002, when they rushed through a vote authorizing the use of military force against Iraq only weeks before the congressional elections, to avoid having the elections become a referendum on the Bush administration’s drive to war.

If America were a democracy in any meaningful sense of the term, it would be considered obligatory to have a full discussion and debate in the course of an election campaign over plans to raid the federal treasury and mortgage future generations to guarantee the riches of the financial elite.

But if the bailout were on the ballot November 4, the voters would repudiate it overwhelmingly. It is precisely because of this opposition that the conspirators of both parties are seeking to reach an agreement this weekend, preempting the issue and depriving the American public of any say in a decision that will profoundly affect the future course of the country.

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http://www.wsws.org/articles/2008/sep2008/bail-s27.shtml

Bernanke’s financial rescue debacle

By Mike Whitney
Online Journal Contributing Writer
Analysis
Apr 8, 2009, 00:22

Fed chief Ben Bernanke has embarked on the most radical and ruinous financial rescue plan in history.

According to Bloomberg News, the Fed has already lent or committed $12.8 trillion trying to stabilize the financial system after the bursting of Wall Street’s speculative mega-bubble. Now Bernanke wants to dig an even bigger hole, by creating programs that will provide up to $2 trillion of credit to financial institutions that purchase toxic assets from banks or securities backed by consumer loans. The Fed’s generous terms are expected to generate a flurry of speculation which will help strengthen the banking system while leaving the taxpayer to bear the losses. It is impossible to know what the long-term effects of Bernanke’s excessive spending will be, but his plan has the potential to trigger hyperinflation or spark a run on the dollar.

Bernanke’s zero-percent interest rates, multi-trillion dollar lending facilities and bank bailouts do not fit within the Fed’s narrow mandate of “price stability and full employment.” With unemployment soaring to 8.5 percent and increasing at a rate of 650,000 per month (with 15 percent underemployed) it is a wonder that Bernanke hasn’t been fired already. There are also myriad problems with Bernanke’s lending facilities which are nothing more than a crafty way of transferring wealth from the Fed to private industry via low interest loans. The Central Bank is not supposed to “pick winners” as it is blatantly doing through its market-distorting facilities. Businesses outside the financial sector cannot exchange their downgraded garbage with the Fed for semi-permanent, rotating loans, so why should underwater investment banks and hedge funds get special treatment? The facilities represent a gift to financial institutions giving them an unfair advantage in the marketplace.

Besides the $2 trillion for the Term Asset-Backed Lending Facility (TALF) and the Public-Private Investment Program (PPIP), the Fed will also provide a multi-billion dollar backstop for the FDIC as bank closures continue to snowball and more reserves are needed to shore up the system. That means that the Fed’s balance sheet could mushroom to over $4 trillion by the end of 2010. The Treasury has already agreed in principle to assume full responsibility for the Fed’s lending facilities (as well as the bailouts of AIG and Bear Stearns) as soon as the financial system stabilizes. By providing loans and US Treasuries to failing companies, instead of capital, Bernanke has sidestepped Congress, thus, undermining the spirit and the letter of the law. Congress has approved a mere $1.5 trillion of the nearly $13 trillion for which taxpayers are now responsible.

The recent 22 percent uptick in the stock market is a sign that Bernanke’s monetary stimulus is beginning to kick in. Oil rose from $33 per barrel to over $50 in little more than a month. Other raw materials have followed oil. The dollar has plunged every time the stock market has gone up. These are all signs of nascent inflation which is likely to accelerate after the current period of deleveraging ends. Food and energy prices will rise sharply and the dollar will come under greater and greater pressure. This is Bernanke’s nightmare scenario: a surge in inflation that forces him to raise rates and kill the recovery before it ever begins. The Fed’s unwillingness to be proactive in dealing with credit bubbles has created a situation where there are no easy answers or pain free solutions.

Bernanke’s approach to the crisis has been wrongheaded from the get-go. It makes no sense to commit nearly $13 trillion to prop up a grossly oversized financial system while providing less than $900 billion stimulus for the real economy. The whole plan is upside down. It’s consumers, homeowners and workers that create demand (consumer spending is 72 percent of GDP) and yet, they’ve been left to twist in the wind while the bulk of the resources have been directed to financial speculators who are responsible for the mess.

Middle class families have seen their retirements slashed in half and their home equity vanish, while their jobs become increasingly less secure. The Fed and the Treasury should be focused on debt relief, mortgage cram-downs, jobs programs and open-ended support for state and local governments. Rebuilding the financial infrastructure for extending more credit to people that are already underwater is beyond shortsighted; it’s cruel. The financial system needs to shrink to fit the new reality of a smaller economy. That means that Bernanke should aggressively mark down the dodgy collateral he’s been accepting (the collateral should reflect current market prices) and force many of the weaker institutions into bankruptcy. This is the fairest and fastest way to shake the deadwood from the financial system. Keeping asset prices artificially inflated only puts off the inevitable day of reckoning.

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http://onlinejournal.com/artman/publish/article_4565.shtml