Written by Biloxi
On Wednesday, The Office of Comptroller of Currency (OCC) and the Federal Reserve had sanctioned mortgage servicers for their misconduct and abuse in the foreclosure debacle was uncovered last year. Click here to read more. On that same day, Senators Carl Levin (D-Mich.) and Tom Coburn (R-Okla.) released a Senate report called the "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse." This report was based on a two-year study led by the U.S. Senate Permanent Subcommittee on Investigations. This report leaves no stones unturned to criticize the major players involved in the financial crisis windfall. Here were some of the highlights of blame in the financial crisis windfall according to the report:
1. Office of Thrift Supervision (OTS)
The report blames OTS for ignoring the red flags and policing the collapse and seizure of the Washington Mutual. According to the report, OTS identified "over 500 serious deficiencies (at WaMu) in five years" and added, "OTS did not once, from 2004 to 2008, take a public enforcement action against Washington Mutual to correct its lending practices, nor did it lower the bank's rating for safety and soundness." Washington Mutual and its Long Beach Mortgage originator securitized at least $77 billion in subprime loans. Both Washington Mutual and its Long Beach Mortgage originator steered high-risk borrowers into larger loans, higher interest rates, and higher-risk products while also accepting loans without verifying borrower income or also called liar loans.
2. Contradictions of Senate report vs. testimony by the former Washington Mutual executives
The report questioned testimony by bank executives. The report turns to the opened testimony by the Washington Mutual executives and their claim to trying to move the bank from risky lending practices. In last year's testimony, former CEO Kerry Killinger and President Steve Rotella claimed to be moving Washington Mutual toward safer lending and said that they recognized the risk in subprime mortgages. See Mr. Killinger's written testimony to the Senate committee last year. Click here. Senate committee released their findings last year of Washington Mutual's risking lending practices. From Puget Sound Business Journal:
— Two of WaMu’s California home loan branches were producing enormously high levels of fraudulent loans. An internal investigation by WaMu executives produced a 2005 report, but no action, according to the committee.
— Washington Mutual was knowingly selling fraudulent loans to investors.
— Even as the housing market tanked, the bank was increasing it securitizations of subprime mortgages through its bank and subsidiary, Long Beach Mortgage, from $2.5 billion in 2000 to $29 billion in 2007, according to the committee.
Well, that was then and this is now. According to the report, report said "in his testimony, [former Washington Mutual President] Mr. Rotella took credit for curtailing WaMu’s growth and high risk lending. Mr. Rotella’s own emails, however, show that he supported the High Risk Lending Strategy." The report cited an October 2005 email in which Mr. Rotella wrote: “I think our focus needs to be on organic growth of home eq, and subprime, and greater utilization of [the Home Loans division] as we know it today to facilitate that at lower acquisition costs and greater efficiency.”
Moreover, the report included this email from Mr. Killinger about the bank’s Long Beach mortgage unit: “Regarding Longbeach, I think there is a good opportunity to be a low cost provider and gain significant share when the industry implodes.”
3. Short on sympathy for lenders and investment banks.
The Senate report concluded on the lenders: "These lenders were not the victims of the financial crisis; the high risk loans they issued were the fuel that ignited the financial crisis." But, the Senate report had the hardest criticism to the investment banks especially Deutsche Bank and Goldman Sachs. Both Goldman and Deutsche Bank were criticized for peddling collateralized debt obligations (CDOs) backed by risky loans that the investment banks’ own traders believed were likely to lose value. Senators Carl Levin and Tom Coburn went even further to say that Goldman Sachs misled Congress after duping clients. Senator Levin said that he is referring the Senate report to the Justice Department to review whether to bring perjury charges against Goldman Sachs CEO Lloyd Blankfein and other current and former employees who testified in Congress last year. Nightly Business Report reporter Darren Gersh interviewed Senator Levin this week. Here is what Senator Levin had to say about Goldman Sachs on Nightly Business Report:
LEVIN: Their numbers are wrong. Net it was a $1.2 billion gain. In the year 2007 they started off in a deep hole. They had a whole lot of securities that were betting positively on the market. They then engaged in a whole bunch of deceptive practices to get out of that hole and then go beyond and to profit. By their own words, we`ve got tens of pages of their own words that we`re engaging in the big short. That in one of their words, they said hey, we lost money on this but then we gained more. And one other thing, there is no justification for deceiving your clients. Whether or not they were able, when they dug out of that hole that they were in at the beginning of 2007, whether they climbed back to even ground or made a lot of money, they made $1.2 billion which apparently is not much to Goldman. They call that you know, that kind of --
GERSH: They did testify Mr. Blankfein and the CFO that they were trying to get closer to home. They were trying to rein in their risk. You`re not buying that.
LEVIN: No, they went way beyond home, way beyond home, $1.2 billion beyond home. Read the report I think you will be satisfied that that is true. But in any event, even if they lost money, which they didn`t, they made money, they engaged in their own words in the big short, that`s their words, not ours. Even if they lost money, they cannot deceive their clients in trying to sell securities. They made money, $1.2 billion. But assume they are right for a moment. They are not but for the purposes of discussion, you cannot sell securities to even get even, which deceive your client.
The Senate report concluded "the crisis was not a natural disaster, but the result of high, risk complex financial products, undisclosed conflicts of interest, and the failure of regulators, the credit rating agencies and the market itself to rein in the excesses of Wall Street." We have seen history repeat itself. And there is a lot of blame to go around from those financial institutions and individuals that contribute to the financial crisis. The real question should be are we going to learn from these lessons and do something about it so that it won't happen again or will history repeat itself again?
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