Revisiting the Financial Crisis: Predatory Lending

According to a Wall Street Journal article, former Federal Reserve Governor Edward Gramlich proposed in 2000 to crack down on predatory lending in the subprime mortgage industry. Chairman Alan Greenspan shot down the proposal.

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.

"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.

Predatory lending was very real. Washington Mutual Bank was bought by JP Morgan Chase. The United States District Court for the Central District of California ruled against JP Morgan Chase.

The first formal complaint was filed against Washington Mutual Bank on January 6, 2012 by the Kenneth Eade Law Firm. Washington Mutual was eventually purchased by JP Morgan Chase. The complaint alleges that Washington Mutual Bank issued both a traditional mortgage and a home equity line of credit in order to finance a customer's Southern California home purchase. In 2008 both loans fell into foreclosure, and the owner's request for a short sale was denied.

After JP Morgan Chase took ownership of Washington Mutual, the bank attempted to collect approximately $250,000 additional dollars from the home equity line of credit. The delinquency also negatively affected the customer's credit score. According to anti-delinquency statutes in California, a bank is prohibited from collecting on money mortgages after a foreclosure has occurred. The suit alleges that JP Morgan Chase is in violation of the federal Fair Credit Reporting Act as well as the California Consumer Legal Remedies Act.

JP Morgan Chase was trying to quickly collect cash from homeowners. In Florida, the defunct David J. Stern law firm attempted to foreclose on homeowners with forged documents.

JP Morgan Chase bought Washington Mutual so they could sell the bad mortgages as mortgage-back securities. The problem was JP Morgan Chase didn't tell investors that the mortgage-backed securities were toxic. JP Morgan Chase was forced to agree to a $13 billion settlement with the state of New York. $4 billion of the money went for relief to homeowners.

New York Attorney General Schneiderman had less than kind words for JP Morgan Chase.

“Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,” said Attorney General Schneiderman, co-chair of the RMBS working group. “This historic deal, which will bring long-overdue relief to homeowners around the country and across New York, is exactly what our working group was created to do. We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten, and as a result we’ve won a major victory today in the fight to hold those who caused the financial crisis accountable.”

Goldman Sachs bought derivatives that bet on the housing market crashing. Goldman Sachs sold to their investors bad mortgage-backed securities.

Sen. Carl Levin questioned CEO Lloyd Blankfein about about Goldman Sachs betting against investments they are selling.

Levin reads internal emails of Goldman Sachs sale force telling each other that Timberwolve was a "shitty deal" for their clients.

An internal email shows that Goldman Sachs knew they making money betting against their clients.

The predatory lending placed homeowners at risk. The mortgages were then bundled up into toxic mortgage-backed securities that hurt such investors as pension funds. Alan Green span did nothing about this when he had the chance in 2000.

Revisiting the Financial Crisis: Mortgage-Backed Securities

This is the start of a series of the financial crisis. The purpose of this series is to prove that there were several indications of an oncoming financial crisis that the federal government chose to ignore.

This Federal Reserve report published in June of 2008 indicates that the Fed realized that there was serious problems with subprime mortgages. In 2007, the S&P/Case-Shiller house price index released a report that indicated the largest drop in home prices since the Great Depression. Part of this was the market adjusting to the housing bubble. What goes up eventually comes down. Home prices went into free well into 2008. Below is a CNN graph of the S&P Case-Shiller National Home Price index numbers for the final quarter of 2008.

Bloomberg News reported on December 7, 2006 that Ownit Mortgage Solutions Inc. laid off 800 workers. The Los Angeles Times reported that Ownit could not meet its financial obligations. Ownit blamed Merrill Lynch & Co. for letting the company die. Former Ownit employee Kevin Panet told this to Bloomberg News about what management told him about Ownit's relationship with Merrill Lynch. The result was a disaster. Mortgages eventually depreciate in value. The housing bubble popped. Yet the major investment banks tried to keep riding the housing wave.

``There were meetings with top management late in the day on Monday saying, `Look, we're having some problems with our partners and brace yourselves,''' Panet said. ``It's a lousy market right now, and it's heading down not up.''

Here is how Ownit worked. Merrill Lynch & Co., JPMorgan Chase & Co., Credit Suisse First Boston were providing funding to Ownit to sell subprime mortgages to people with bad credit. These investment institutions would then buy the subprime mortgages and bundle them up into mortgage-backed securities. Merrill Lynch, and JPMorgan Chase bailed when the housing bubble popped. Ownit filed for Chapter 11 bankruptcy on December 28, 2006.

In 2004, Erick Bergquist reported half of its $4 billion worth of production to Merrill Lynch.

A Merrill spokesman confirmed that it had bought a stake in the wholesaler. "Merrill Lynch is active in the mortgage-backed securities market in many areas.

We are always looking to establish strategic relationships with quality firms," a Merrill spokesman said.

Merrill Lynch and other investment banks started losing billions in 2007. In good part to mortgage-backed securities. Merrill Lynch CEO E. Stanley O'Neal was forced to step down.

In pure destructive power, the subprime mess has become Wall Street's version of Hurricane Katrina. It has wreaked havoc on the nation's iconic brokerage firm, Merrill Lynch (Charts, Fortune 500), and biggest bank, Citigroup (Charts, Fortune 500), which have announced billions of dollars in losses and parted ways with their celebrated CEOs, E. Stanley O'Neal and Charles Prince. Banks, brokerages, and lenders have announced thousands of layoffs, and more are sure to come.

The blow to shareholder wealth is staggering. Since June 29, Citi's share price has dropped 35%, from $51 to $33, while Merrill's stock has slid from $84 to $54, a 36% swoon. In the same period, the dozen biggest Wall Street firms and the commercial banks with the largest investment arms - a list that includes Bank of America (Charts, Fortune 500), J.P. Morgan Chase (Charts, Fortune 500), and Credit Suisse (Charts) - have lost more than $240 billion in market value. Dozens of smaller companies in the mortgage business have suffered huge losses or folded completely.

To be continued.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 by Michael Robert Hussey