Real Estate

The Big Banks Enabled Subprime Lenders


Data from millions of mortgages show the big financial institutions at the center of the financial crisis were major players in the housing-market abuses that precipitated it, a new report argues.

Mining federal lending data, the May 6 report from the Center for Public Integrity, a Washington watchdog group, concluded that nearly all of the top 25 subprime mortgage lenders, responsible for roughly $1 trillion in high-interest loans from 2005 through 2007, were owned or heavily financed by major Wall Street and commercial banks. Several of those major banks have received federal bailout funds over the last eight months.

"Some of the banks being bailed out were directly responsible for their own demise," said John Dunbar, one of the report's chief authors. "This is a self-inflicted wound." The Center for Public Integrity, which focuses on public accountability, was founded and is largely run by former national correspondents for broadcast outlets and newspapers; its funding comes from individuals and foundations.

Many of the top lenders had settled allegations of predatory lending over the years, the report notes. Most of the top 25 are out of business, but five—Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), the American General Finance unit of American International Group (AIG), and GMAC (GKM)—are still lending and have received billions of dollars in federal assistance.

Voracious Demand

Scott Talbott, a lobbyist with the Financial Services Roundtable, a trade group for large financial companies, dismissed the report as simplistic and outdated. He said the group is "missing the larger picture," given that the financial-services industry is large and complex, with a variety of players, and added: "The problems in the subprime market have been fixed, and the industry is focusing on strengthening the housing market."

The report's authors argue that voracious demand by investors for mortgage-backed securities helped fuel the dramatic rise in high-interest loans to generally riskier borrowers. As those loans soured, credit markets deteriorated, and ultimately seized up last fall when investment bank Lehman Brothers collapsed. Since then, the federal government has plowed hundreds of billions of dollars into programs designed to thaw the credit markets and stabilize shaky financial institutions.

The CPI study concluded that Lehman Brothers was the biggest underwriter of mortgage securities from 2000 to 2007, at $106 billion, followed by RBS Greenwich Capital at $99.3 billion, and Countrywide Securities, at $74.5 billion. Morgan Stanley (MS), Credit Suisse (CS), Merrill Lynch (BAC), and Bear Stearns also ranked high on the list of financiers.

The report found that 9 of the top 10 lenders were based in California, including all of the top five. In addition, 20 of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy, the report said. Most of those were nonbank lenders.

Francis is a correspondent in BusinessWeek's Washington bureau.

Francis is a correspondent in BusinessWeek's Washington bureau.

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