A new U.S. Senate investigation offers yet more evidence that the financial crisis was an inside job.
A 639-page report and a two-year investigation by the Senate Permanent Committee on Investigations offers example after example of bankers and others deliberately packaging and selling lousy mortgage loans. Sen. Carl Levin, the Michigan Democrat who oversaw the bipartisan inquiry, says they sold the loans to anyone, motivated by sheer greed.
In one 2007 case, executives at Washington Mutual Bank were urgently trying to sell risky loans likely to go delinquent to get them off its own books and pass the expected losses on to investors, the committee report concludes.
“The performance of newly minted option arm loans is causing us problems,” wrote WaMu loan risk officer Cheryl Feltgen to the head of bank’s mortgage loan division, David Schneider, in February 2007. “We should address selling [in the first quarter] as soon as we can before we lose the oppty.”
The Senate panel investigators found that WaMu pooled 1,900 loans worth more than $1 billion in a security in March 2007. Within 9 months, the ratings on the loans were downgraded and by February 2010, more than half the loans were delinquent.
Washington Mutual became the largest bank in U.S. history to fail. Last month, the Federal Deposit Insurance Corp. filed a civil lawsuit accusing former top WaMu executives of gross negligence, and seeking some $900 million from the executives and their wives.
The Senate committee used WaMu as one of several case studies in its investigation.
Goldman Sachs was 'sticking it to its customers'
Levin was especially critical of Goldman Sachs, which he described as the only bank to rake in huge profits during the recession. Part of its success, Levin said, was due to a radical change in its investments once it determined the subprime mortgage market looked weak.
In just two months in 2007, Goldman Sachs went from investing $2 billion in subprime assets to reversing itself and making a huge bet against that market. By Feb. 21, 2007, Goldman Sachs had risked $10 billion on a bet that the subprime market was going to deteriorate, the panel said. Yet at the same time it was still selling subprime assets to its customers.
“The tactics that they used I thought were disgraceful,” Levin said, adding that Goldman Sachs was “sticking it to its own customers.”
Goldman Sachs has objected to the characterization that it was shorting the subprime market. But the committee report says flatly that this defense is not credible.
Levin accused Goldman Sachs of misleading both its clients and Congress, and said he will forward information uncovered in the committee investigation to the Justice Department and the Securities and Exchange Commission.
Asked why there had been no criminal charges brought against those responsible for the financial crisis, Levin told reporters, “My only answer is that there is still time. Hope springs eternal.”
Republican Sen. Tom Coburn of Oklahoma agreed with the investigation’s findings, saying, “It shows without a doubt a lack of ethics in some of our financial institutions.” Coburn said greed, conflicts of interest and lack of transparency helped cause the financial crisis.
Last year, Goldman Sachs agreed to pay $550 million to settle the SEC’s civil charges that the company lied to investors about a subprime mortgage product known as Abacus 2007-AC1 as the housing market began to collapse. Goldman neither admitted or denied the charges as part of the settlement.
Among the highlights of the Senate committee's investigation:
- In 2007, Goldman Sachs sold mortgage-backed securities and collateralized debt obligations to clients without telling them that it was betting against those same securities.
- In one case, Goldman Sachs made a $1.7 billion gain at the expense of its clients by shorting a security known as Hudson without telling the clients.
- In the months before a massive credit rating downgrade of securities, there were several internal emails circulated by Standard & Poors employees warning that the housing market could collapse.
- In February 2007, an S&P email warned that a massive downgrade of mortgage-backed securities was likely. “My group is under serious pressure to respond to the burgeoning poor performance of sub-prime deals,” one employee wrote. Yet, S&P continue to rate subprime assets with its highest rating until July 10, when a massive downgrade helped trigger the financial crisis.
The lengthy, new report is the latest effort to summarize the roots of the financial crisis that rocked U.S. financial markets in 2007-09.
The Financial Crisis Inquiry Commission, created by Congress, interviewed hundreds of witnesses before issuing its 633-page findings in January 2011. It blamed former Fed Chairman Alan Greenspan, risky borrowing by big banks, inaction by the SEC, and a systemic breakdown in bankers' ethics for much of the crisis, but the report's conclusions were undercut by dissension between Republican and Democratic members of the panel.
Another entity, the Congressional Oversight Panel, was created to publish monthly reviews of the state of the financial markets and the Treasury Department's management of the $700 billion Troubled Asset Relief Program bailout program. The panel disbanded after issuing its final report last month.
And a court-appointed examiner in the bankruptcy of Lehman Brothers Holdings Inc., issued a 2,200-page report in March 2010 detailing how the investment bank used accounting tricks to hide bad investments before its collapse.