NEW YORK (MainStreet) — Some three years after the collapse of the financial industry, a bipartisan report from the Senate’s Permanent Subcommittee on Investigations has determined that banks, regulators and credit agencies all share the blame for the subprime mortgage crisis that facilitated this collapse and eventually led the country into a recession.
Washington Mutual Bank is singled out in the report for shady lending practices, while other financial institutions like Goldman Sachs and Deutsche Bank are criticized for dubious investment tactics. Major credit rating agencies like Moody’s and S&P are faulted for their failure to appropriately assess the risk posed by a number of investments and the government’s Office of Thrift Supervision, charged with the all-important task of regulating savings banks, is bashed for failing to do its job.
“Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets,” said Sen. Carl Levin (D-Mich.), who chairs the subcommittee and who co-sponsored the report along with Sen. Tom Coburn (R-Okla.). “High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets.”
The story of the collapse, as told in the report, essentially begins several years before the recession when Washington Mutual decided in 2005 to initiate a high-risk mortgage-lending strategy, underwriting loans to middle and lower class Americans who were traditionally turned down. Within one year, many of those loans began to default; within two years the bank suffered major financial losses from this strategy and by 2008, the company faced a liquidity crisis and was seized by government regulators and eventually sold off to Chase.
The bank’s strategy had several impacts on the market. For starters, it led to a surge in demand for housing as more consumers were able to secure mortgage loans, causing a housing boom that of course ended up going bust when millions of Americans fell behind on their payments. Washington Mutual also proved to be the largest bank failure in history, which unsettled the markets, and before it collapsed, the bank began selling off some of its risky loans to Fannie Mae and Freddie Mac, contributing to their downfall as well.
While Washington Mutual may have helped kick-start the subprime mortgage crisis, other financial institutions played off of it to market investments, only to make the inevitable collapse that much worse.
Goldman, which was grilled very publicly by Congress last year for its role in the meltdown, once again comes off as the leading culprit in this saga. The investment bank bundled these mortgages into larger investment packages and sold them to clients for a nice profit. But when Goldman realized the mortgage market was a taking a turn for the worse, it deliberately bet against the market even while continuing to push these mortgage-backed securities to its clients.
In one exchange, Goldman reportedly promised investors that their interests were completely “aligned,” when the bank had in fact shorted its own investment in order to ensure profits when those mortgage-backed securities flopped.