A Center for Public Integrity report released today, "Who's Behind the Financial Meltdown," spells out how 25 of the country's largest financial institutions fueled the subprime mortgage market that precipitated the global financial crash. In addition, as a complementary Financial Times report today shows, these institutions spent more than $370 million over the past decade in lobbying and campaign cash for the deregulated environment that allowed their behavior to go unchecked.
It is a glaring example of what Robert Borosage writes today and what other writers have said repeatedly: Wall Street bought our political system out from under the rest of us so it could be used to their ends, and now we are the ones who are paying the price.
The Center for Public Integrity , a nonprofit investigative journalism site, reports that:these top subprime lenders were not simply "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."
Key findings of the study:
- 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.
- Eleven of the lenders on the list have payments totaling billions of dollars to settle claims of widespread lending abuses. Four of those have received bank bailout funds, including American International Group Inc. and Citigroup Inc. The top lender on the list, Countrywide, last year paid more than $8.6 billion to settle a predatory lending suit brought by the District of Columbia and 49 states.
- A computer analysis of more than 350 million mortgage applications reported to the federal government between 1994 and 2007 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. Loan-to-income ratios rose from 1.65 in 1994 (meaning the average mortgage loan was 165 percent of a borrower's income) to 2.46 in 2005.
Bill Buzenberg, in a commentary accompanying the report, wrote that the investigation shows the extent to which the line being touted by financial institutions—that they were "victims" of rogues within their operations and that no one could foresee the damage that could be created by the toxic assets on their books—is bull.
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. ...
Did these major financial institutions not understand what kind of lending was taking place? The poor quality of these loans was no secret. Many of these subprime lenders, the Center found, were forced to pay billions of dollars to settle government charges of abusive or predatory lending practices. This was a period of some of the worst mortgage lending in American history, in which regulators were nowhere to be seen, and normal income documentation and loan standards were thrown out the window. In many cases, though, the big banks really didn’t care if the loans were bad. That’s because they’d bought “insurance” against them — those infamous “credit default swaps.” The swaps sounded good, except they were unregulated, and those selling them — like American International Group Inc. — didn’t have to maintain reserves to guard against unforeseen losses.
It was all a house of cards, and some tried to sound the alarm. A look at the historical record shows that Washington was warned repeatedly over the last decade — by consumer advocates and a handful of regulators and lawmakers — 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. ...
Despite such warnings, Congress, the White House, and the Federal Reserve all dithered while the subprime disaster spread. Long forgotten congressional hearings and oversight reports, as well as interviews with former officials, reveal a troubling history of missed opportunities, thwarted regulations, and abject lack of oversight. Instead, the financial industry supported more deregulation, along with an extraordinary disregard for the damage being done. This was accompanied by millions of dollars in political contributions to leading lawmakers of both parties from the same financial industry that is in such trouble today.
Those campaign contributions, as this chart shows, were more heavily showered on Democrats than they were on Republicans during the past 10 years. Of $23 million in campaign contributions, the major Democratic campaign committees received at least 51.3 percent, with the presidential campaign of Barack Obama receiving 9.3 percent of the total.
In addition, just one of these firms, Countrywide, spent at least $2.9 million on direct lobbying from 2006 to 2008, based on data collected by OpenSecrets.org from reports filed with Congress.
The continuing lobbying muscle of the big financial institutions was largely responsible for last week's defeat of a mortgage reform bill that would have allowed bankruptcy court judges to write down the value of mortgages that were likely to have been fraudulently inflated to begin with. That same muscle is being used this week by the credit-card oligopoly to defeat legislation that would put restraints on their ability to bilk consumers.
It will take a lot of citizen power, striking fear in the hearts of both Democrats and Republicans, to fight back against a lobby that still retains so much political power even as it has destroyed so many lives.