Marketplace Scratch Pad

Who’s Behind the Financial Meltdown

Scott Jagow May 6, 2009

Here’s a fact — the banks getting bailed out by the government were irrefutably a key reason for the subprime lending crisis. I say irrefutably because the Center for Public Integrity just released an in-depth study of 7.2 million subprime loans made between 2005 and 2007. And here’s what they found:

25 lenders were responsible for 72 percent of all reported high interest loans. Of those 25, 21 “were directly or indirectly financed by the mega banks that received bailout money — through direct ownership, credit agreements, or huge purchases of loans for securitization.” From the report:

During the boom years, investment banks provided a staggering amount of cash to subprime lenders so they could make loans.

Between 2000 and 2007, backers of subprime mortgage-backed securities — primarily Wall Street and European investment banks — underwrote $2.1 trillion worth of business, according to data from trade publication Inside Mortgage Finance. The top underwriters in the peak years of 2005 and 2006 were Lehman Brothers at $106 billion; RBS Greenwich Capital Investments Corp., at $99 billion; and Countrywide Securities Corp., a subsidiary of the lender, at $74.5 billion. Also among the top underwriters: Morgan Stanley, Merrill Lynch, Bear Stearns, and Goldman Sachs.

The Center’s Bill Buzenberg puts it this way:

The largest American and European banks and investment houses were not the unwitting “victims” of an unforeseen financial collapse, as they have so often been portrayed. The mega-banks not only invested in subprime lending institutions — they were the enablers, bankrollers, and instigators driving high-interest lending, and they did so because it was so lucrative and unregulated.

Worse, in many instances these are the same financial institutions the government is now bailing out with tax revenues.

Although this may not seem like “news”, the Center’s report, “Who’s Behind the Financial Meltdown”, is definitely worth reading. It really spells everything out based on thorough reporting, and the findings are presented in an accessible way, with excellent maps, charts and graphs.

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