The banks were “enablers that bankrolled the type of lending threatening the international financial system,” according to the study being released today by the Center for Public Integrity, a Washington-based watchdog group.
The center collected data on the top two dozen subprime lenders in an effort to paint a comprehensive picture of how each major player was linked to the banking system.
“What happened to our largest financial institutions was very much a self-inflicted wound,” said the center’s executive director, Bill Buzenberg. “These banks owned many of the subprime lenders and financed their lending in order to get bundles of mortgage-backed securities that they could sell, reaping enormous profits.”
The report noted that investment banks Lehman Bros., Merrill Lynch, J.P. Morgan and Citigroup “both owned and financed subprime lenders,” and that others, including Goldman Sachs & Co. and Swiss bank Credit Suisse First Boston, were major financial backers of subprime lenders.
Financial services industry officials called the analysis simplistic and stale.
Although it is well established that California was home to many of the companies at the leading edge of the subprime mortgage crisis, the study lays out the overwhelming role that the state’s financial institutions played in fueling the subprime boom.
Nine of the 10 largest originators of subprime loans were headquartered in the state, mostly in Orange County.
These high-interest-rate loans were typically made to borrowers with poor credit, often with no documentation of their income or assets. Those loans were bundled into securities sold to investors.
When home prices plunged and borrowers defaulted on their loans, these securities became the “toxic assets” clogging credit markets.
The big subprime lenders included Countrywide Financial Corp., Ameriquest Mortgage Co., New Century Financial Corp. and Long Beach Mortgage Co.
The industry blossomed in California, in part because of the state’s once-booming real estate market and also because the mortgage business was poorly regulated in the state, analysts say.