Who's Behind the Financial Meltdown?

You broke it? You fix it.

By John Dunbar

Firms that fed off the subprime lending frenzy that devastated the banking system are lining up to collect more than $21 billion in taxpayer funds meant to help bail out borrowers now in trouble on their loans.

Who's Behind the Financial Meltdown?

Meltdown 101

By John Dunbar

Just how did we get into this economic mess? The answers are both complex and troubling. Blame greed, irresponsibility, lax government oversight, conflicts of interest and especially blind faith in a housing boom that seemingly had no end. But end it did, setting off a chain reaction that has left the economy in tatters and stuck the American people with the tab.

Thus far, the government has committed $1.75 trillion to buying or propping up a portfolio dominated by devalued real estate assets — and this may be just a down payment. The Obama administration has a new plan that will commit more government cash to rid the financial system of the toxic assets that have wrecked the economy.

Roots in an Earlier Collapse

The origins of the current crisis can be found in an earlier calamity — the collapse of the technology industry in 2000. The Federal Reserve responded to that downturn by lowering interest rates. Ideally, lower rates trigger more borrowing and spending, which in turn lead to economic growth.

In May 2000, the Federal Reserve’s federal funds rate — the rate banks charge one another for overnight loans — was 6.5 percent. By August of 2001, it was 3.5 percent. The Fed further lowered rates after the attacks of September 11, to 1.75 percent by December. By June 2003, the rate had been cut to 1 percent and the average monthly rate on a 30-year, fixed mortgage, according to a Federal Home Mortgage Corp. (Freddie Mac) survey, dropped to 5.23 percent, the lowest level since the mortgage buyer started tracking rates in 1971. And so everyone, it seemed, was looking to buy a home.

Who's Behind the Financial Meltdown?

Commentary: The mega-banks behind the meltdown

By Bill Buzenberg

There is something of a myth surrounding the current economic crisis, how it unfolded, and the precise role of the world’s largest financial institutions in the global meltdown. That myth suggests these banks and investment houses were somehow surprised “victims” of unscrupulous subprime mortgage lenders, and that they could not have anticipated the damaging toxic assets that have so infected their balance sheets.

What’s missing from this story is the fact that this was a self-inflicted wound for which the rest of us are picking up a massive tab. The largest American and European banks and investment houses were not the unwitting “victims” of an unforeseen financial collapse, as they have so often been portrayed. The mega-banks not only invested in subprime lending institutions — they were the enablers, bankrollers, and instigators driving high-interest lending, and they did so because it was so lucrative and unregulated.

Worse, in many instances these are the same financial institutions the government is now bailing out with tax revenues. How these bottomed-out banks helped cause the financial meltdown can be clearly seen in a new study by the Center for Public Integrity. The Center ran a computer analysis of every high-interest loan reported by the industry to the U.S. government from 2005 through 2007, a period that marks the peak and collapse of the subprime market. From this pool of 7.2 million loans, our investigators identified the top subprime lenders. The “Subprime 25” were responsible for nearly a trillion dollars of subprime lending, or 72 percent of all reported high interest loans.

Who's Behind the Financial Meltdown?

Traders work on the floor of the New York Stock Exchange on Monday, Aug. 8, 2011. Jin Lee/The Associated Press

A roundup of investigations in the three years since the last market crash

By Shirley Gao

The stock market is in a tailspin after the U.S. government lost its AAA credit rating for the first time in history, raising echoes of the catastrophic Wall Street fallout three years ago.

But how did it all begin? Who were the key players? Where do regulators go from here? Here, we recount the Center for Public Integrity’s top stories on the 2008 financial meltdown and the subsequent market and government response.

Subprime mortgages underlying the road to financial ruin (May 6, 2009) – Just how did we get into this mess? Multiple factors have been cited: “blame, irresponsibility, lax government oversight, conflicts of interest and especially blind faith in a housing boom that seemingly had no end.” But fueled by subprime lending, the boom ended in bust. Borrowers took out too many loans they couldn’t afford, housing prices tanked, and by the summer of 2007, the subprime industry had all but disappeared because big banks had cut off access to credit. The government responded by promising to use taxpayer money to buy so-called “toxic” mortgage assets from banks so lending could start again. On Oct. 3, 2008, President Bush signed the $700 billion Emergency Economic Stabilization Act into law. Calls for increased regulation over the financial and housing industries would later yield stricter legislation.

Top 25 subprime lenders (May 6, 2009) – The top 25 subprime lenders accounted for nearly $1 trillion of subprime loans, about 72 percent of the high-priced loans reported to the government at the peak of the subprime market. The leader in lending was Countrywide Financial Corp, responsible for at least $97.2 billion, followed by Ameriquest Mortgage Co./ACC Capital Holdings Corp with at least $80.6 billion and New Century Financial Corp. at $75.9 billion.

Who's Behind the Financial Meltdown?

More mortgage fraud reporting?

By Kat Aaron

Nonbank mortgage lenders would have to file reports of suspected fraud for the first time, under a new proposal issued Wednesday by the Financial Crimes Enforcement Network, or FinCEN, an arm of the Treasury Department.

Who's Behind the Financial Meltdown?

Subprime loans were big business for struggling lender CIT

By Kat Aaron

Troubled lender CIT Group found itself on the brink of bankruptcy Monday, as concerns regarding its liquidity and debt mounted. The company describes itself as “a leading provider of financing to small businesses and middle market companies.” But its current precarious position may be attributable in part to the more than $5.6 billion in subprime loans CIT made between 2005 and 2007.

Who's Behind the Financial Meltdown?

Mortgage companies and the new regulatory regime

By Kat Aaron

Everyone knew it was coming. With all the turmoil in the American financial system, a push for re-regulation was inevitable. The Obama administration’s sweeping plan, announced today, includes the creation of a Consumer Financial Protection Agency (CFPA). And tucked into that section of the 85-page white paper is a critical detail: For the first time, non-bank mortgage companies would be subject to regulation from the federal government.

Who's Behind the Financial Meltdown?

Leaders of the nation’s No. 1 subprime lender charged by the SEC

By Kat Aaron

Angelo Mozilo, founder and former CEO of Countrywide Financial — the No. 1 subprime lender in America, according to a Center for Public Integrity report — was charged today with securities fraud and insider trading by the Securities and Exchange Commission. Former Countrywide chief operating officer and president David Sambol and former chief financial officer Eric Sieracki are also facing fraud charges.

Who's Behind the Financial Meltdown?

Subprime loans may have sunk BankUnited FSB

By Laura Cheek

On May 21, BankUnited FSB became the 34th federally insured institution to be taken over by regulators this year. The takeover will put another major dent in the FDIC’s deposit insurance fund, with estimated costs running a cool $4.9 billion. The BankUnited takeover is trumped only by the FDIC’s $10.7 billion dollar rescue of IndyMac Bank in July 2008.

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