Wednesday, May 6, 2009

Few escape blame over subprime explosion

These are largely the same people in Congress who are now trying to "fix" the mess they created and must surely carry a good measure of the blame!

Published in the Financial Times (the Pink Paper)
By Edward Luce

Published: May 6 2009 05:02 | Last updated: May 6 2009 05:02

Chronicling the explosion of subprime mortgages is a bit like reading Murder on the Orient Express. As in the novel, in which everyone is revealed to have had a hand in the murder, America’s subprime story implicates almost every power centre – including the Bush administration, the Federal Reserve and the Democratic party.

Take Roland Arnall, founder and chief executive of Ameriquest Mortgage Co, the California-based company that made more than $80bn in subprime mortgages between 2005 and 2007.

Ameriquest was repeatedly held up by regulators and courts for abusive lending practices, most recently in 2006 when it agreed to pay a $325m fine after it was shown it had misled borrowers, falsified documents and pressed appraisers to inflate home values.

The company, which has since closed, gave $263,000 to George W. Bush in campaign contributions. Mr Arnall, who died last year, went on to become Mr Bush’s ambassador to the Netherlands. To keep things even-handed, his company donated $1.57m to the Democratic party.

Between 2005 and 2007, which was the peak of subprime lending, the top 25 subprime originators made almost $1,000bn in loans to more than 5m borrowers, many of whom have had their homes repossessed, says the Center for Public Integrity, a Washington-based journalistic watchdog.

CPI contacted the chief executives or former CEOs of all of the 25 originators. Most did not respond. Of those that did, Goldman Sachs said in a statement: “As an industry, we collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public’s long-term interest.”

Those loans lit the fuse that led to the global financial meltdown. The Fed, which refused to tighten regulation of these non-bank companies, since it is charged only with direct regulation of banks, told Congress it would be too expensive to provide oversight.

Last October Alan Greenspan, former Fed chairman, told a congressional committee: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief.” But resistance to regulation went deeper than Mr Greenspan’s ideological objections.

The CPI investigation shows most originators spent millions of dollars lobbying Washington in the mid-1990s, much of it to prevent new legislation that would tighten restrictions on subprime lending.

The financial sector has spent $3.5bn in the past decade lobbying in Washington and made $2.2bn in campaign donations, says the Center for Responsive Politics, an independent watchdog.

The CPI investigation shows that at least 21 of the 25 top subprime originators, most of which are bankrupt, were either owned or financed by the biggest recipients of troubled asset relief funds, including Citibank, Bank of America, Wells Fargo and JPMorgan – also the largest political donors in Washington.

HSBC, the British bank, is listed as the eighth largest subprime originator because of its purchase of Decision One in 1999 and Household International in 2003. From 1999 to 2008 HSBC donated more than $6.4m and spent $21m on lobbying activities in Washington.

“The largest American and European banks made the bubble in subprime lending possible by financing it on the front end, so they could reap the huge rewards from securitising and selling mortgage-backed securities on the back end,” says Bill Buzenberg, who led the investigation. “Washington was warned repeatedly over the last decade that these high-cost loans represented a systemic risk to the economy. It is hard to believe the major banks were unaware of what was going on, or what the consequences might ultimately be.”

Among the other top originators were New Century Financial Corp, which was alleged by investigators in its 2007 bankruptcy proceedings to have had an “aggressive manner that elevated the risks to dangerous and ultimately fatal levels”. Its largest financial backer was Goldman Sachs, which has received $10bn in Tarp bail-out funds.

One of the few to remain in business is Wells Fargo Financial, which is owned by the bank, which made $51bn in subprime loans between 2005 and 2007 and which spent almost $18m on election donations and lobbying – again almost equally between Democrats and Republicans. Barack Obama was its largest individual recipient with $201,000 in election expenses.

According to the CPI, all the laws that helped fuel the subprime crisis remain. Since the late 1990s there have been attempts to tighten up regulation through legislation. But each time it was shot down.

The report highlights a new bill, sponsored by Barney Frank, a Democratic congressman, which would create “assignee liability provisions” that would make mortgage securitisers res-ponsible for abuses in the original mortgages.

If such a law had been on the books earlier, says CPI, the subprime crisis might never have happened.
Copyright The Financial Times Limited 2009

No comments:

Post a Comment